Dancing to its own tune: U.S. Federal Reserve holds interest rates steady again

May 7, 2025

Richard Schmidt

Key takeaways

The target for the U.S. federal funds rate remains unchanged at 4.25-to-4.5%.
Uncertainty on U.S. trade, regulatory and fiscal policy has increased uncertainty and raised the U.S. Federal Reserve’s concerns about economic growth, employment and inflation.
Amid the uncertainty, we remain neutrally positioned in portfolios with a tactical asset allocation overlay – asset allocations are in line with long-term strategic weights.

Despite calls for interest rate cuts from President Trump, the U.S. Federal Reserve (Fed) continued its wait-and-see approach. While the Fed is a government agency, it is important to note that it is independent from both the President and Congress, and is solely responsible for financial stability through monetary policy. For those keeping count, the Fed has now held the target for the federal funds rate at 4.25-to-4.5% for three consecutive Federal Open Market Committee (FOMC) meetings. The decision was widely anticipated and unanimously voted for by members of the FOMC.

In the press conference following the Wednesday announcement, Fed Chairman Powell made it clear that the Fed is in no hurry to make policy changes as it evaluates how President Trump’s trade, regulatory and fiscal policy decisions will play out on economic growth, employment and inflation.

U.S. growth remains solid, but risks continue to increase

Despite everything that has happened, the Fed noted that the U.S. economy “continued to expand at a solid pace” and that labour market conditions remain “solid” through the early part of 2025. However, the Fed did acknowledge that “uncertainty about the economic outlook has increased further,” and that “inflation remains somewhat elevated.”

While it remains unseen how things will play out, the President has been more aggressive than anticipated. The Fed “judges that the risks of higher unemployment and higher inflation has risen.” On top of that, the net impact of the President’s regulatory and fiscal policy decisions, unknowns at this time, remains unclear. It’s for these reasons the Fed justified its more patient approach. The worst-case scenario would be stagflation, where inflation continues to climb and economic growth stalls.

The U.S. has recently softened its stance and many trade deals are reportedly close. Given that, we do expect the Fed to cut rates later this year.

Returning to a neutral view on equities vs. fixed income and cash

Financial markets continue to experience volatility as investors try to figure out what the latest trade-related news means for businesses and the global economy. While much remains uncertain, we will continuously monitor the evolving economic and market landscape to determine if strategic and tactical adjustments are needed to adjust the positioning of your portfolio for long-term growth.

Diversification remains a powerful tool in portfolio construction—our strategic allocation across asset classes, sectors, and geographies helps cushion portfolios against area-specific downturns while positioning to capture growth across various market segments. Peeling back another layer, we continue to emphasize underlying strategies that give our portfolios access to high-quality companies with strong balance sheets, competitive advantages, and proven margin resilience during times of economic stress.

As a reminder in portfolios with a tactical asset allocation overlay, we removed our tactical overweight to equities in early April and we remain neutrally positioned in equities overall relative to fixed income and cash. As evidenced in the Fed’s latest comments, trade tensions have generated significant uncertainty to the global economic and financial market outlook. Given recent developments and the unpredictability of the path forward, keeping portfolios at their long-term strategic asset allocations is warranted.

The Fed’s next interest rate announcement is scheduled for June 18^th and will be accompanied by the latest Summary of Economic Projections.

Richard Schmidt

Richard Schmidt, CFA, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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