While economists agree the Federal Open Market Committee will keep rates in
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"The relative strength of
Expect volatility to continue this month, he said, with the 10-year Treasury yield moving on "bond market fears about higher deficit and debt refinancing."
Budget reconciliation remains a focus of the bond market, Ragan said, but the "expected contentious process will lead to market volatility throughout the month of May."
Looking at the increase in yields of the 2-year Treasury, which rose 25 basis points in a week, "suggests two 25bps fed funds cuts in the months ahead vs. perhaps three cuts priced in a week ago," Ragan added.
"Softer data in the near-term will give the Fed room to cut rates at either the June or July meetings," he said.
The April employment report "means that tariff uncertainty has not hit the U.S. jobs market yet," said JoAnne Bianco, partner and investment strategist at BondBloxx. The report "has given the Federal Reserve more breathing room in terms of imminent interest rate cuts."
Federal Reserve officials' strategy has shifted "from holding rates steady to keep inflation contained to being ready to lower rates to prevent a significant rise in unemployment," she said.
Morgan Stanley researchers said, "The Fed should stay on hold in May while signaling it needs clarity from the data to know which way to move."
They expect no rate cuts this year. "The Fed is unlikely to act preemptively given its expectation that inflation will be firming, and the size of the tariff shock could produce persistent inflation effects."
But the Fed is in a difficult spot, according to
While the Fed won't cut rates at this meeting, he said, they "may want to signal less confidence in economic momentum."
The post-meeting statement will likely refer to "more moderate growth, while still emphasizing a solid labor market," Scherrmann said.
The tone may be slightly more hawkish, he added, "but more in the direction of an extended pause than a potential hike."
The Fed will hold rates "at least until a slowdown in economic activity and the associated weakening of the labor market allow for disinflationary expectations," Scherrmann said. "This could be the case later in the year, which is why we still expect the Fed to cut rates up to three times over the next 12 months."
While the statement should be similar to March's, Anthony Saglimbene, chief market strategist at Ameriprise Financial, said, the "policy statement and comments from Fed Chair [Jerome] Powell in his press conference will remain guarded and largely balanced."
With tariffs' impact still undetermined, he said, "it's unlikely the Fed will tip its hand" related to a possible June cut. "The key question: Is June a live meeting for a rate cut?" he said.
"The Fed has ample room to cut its policy rate if necessary," whether in June, July or later, Saglimbene said.
"Of course, the committee will remain attentive to inflation pressures and tariff dynamics over the coming weeks and months," he said. "These conditions could cloud the picture for monetary policy, potentially delaying a Fed response to slower growth that could disrupt markets for a period should such a condition unfold."
Employment will be the key, Saglimbene said. If unemployment creeps up, the Fed will act, ignoring "temporary tariff pressures."
But if employment holds up despite slowing, but not stalled, economic activity, "the Fed may be less willing to cut rates until later this year, or [until] it sees more need to do so. As such, we expect investors will want to hear more from Powell … about where those goalposts might lie and under what conditions would prompt further rate cuts from here or delay a Fed response," Saglimbene said.
While no change at this meeting, should "we get some more clarity on trade and tax policy in the next few weeks and if the economy shows further signs of weakness, we do expect a 25-basis point cut at their June 18th meeting," said David Kelly, chief global strategist at J.P. Morgan Asset Management.
"If that weakness morphs into a mild recession, we expect further easing, with the federal funds rate falling from its current 4.25% to 4.50% range to 3.00% or lower by the end of the year," he said. "That being said, the inflationary consequences of tariffs and potential fiscal stimulus could preclude a quick return to near-zero short-term interest rates."
University of Central Florida
Since the last Fed meeting, D.A. Davidson's Ragan noted, labor market data remained "healthy" and expansionary, while the economy contracted slightly. "The GDP report included clear evidence that the tariff threat is having an impact on economic data, as the net negative effect of net imports and higher inventories took away 260 basis points from GDP."
Reporters will pepper Powell with questions regarding "to assess the Fed's view on the import distortion." Ragan believes "Powell is likely to say that the imports data could reverse in the second quarter, adding to GDP, but there is a risk that imports slow dramatically as some tariffs make inputs that are imported unaffordable. This could cause stagflation, and we expect Powell to highlight the risk of higher inflation and weaker GDP growth."
Still, he noted, the expected hold on rates will elicit "new criticism" from President Trump.
"While Chair Powell might have 'poked the bear' by criticizing Trump administration tariff policies at the Mid-April Economic Club of Chicago speech, we believe that Trump does not want to erode confidence in the bond market, so will dial back the rhetoric to some degree," Ragan said.
