The All Ordinaries Index (ASX: XAO) is up 0.1% in the wake of the US Fed's overnight decision to leave interest rates in the world's largest economy on hold.
The unanimous decision by the Federal Open Market Committee (FOMC) will keep the official federal funds rate in the range of 4.25% to 4.50%.
That's down from the range of 5.25% to 5.50% last year, before the Fed first began cutting interest rates in this cycle on 18 September 2024.
But with the FOMC concerned that US President Donald Trump's tariffs could potentially reignite inflation and citing that "uncertainty about the economic outlook has increased further," US and ASX investors alike will have to keep waiting for the next rate cut.
What did Powell say about keeping interest rates on hold?
Federal Reserve Chair Jerome Powell pointed to two major concerns facing the central bank in its interest rate decision. Namely the possibility of the Trump tariffs fuelling inflation and that they could also lead to higher unemployment.
According to Powell (quoted by Bloomberg):
If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment.
And Powell made it clear that the FOMC won't be rushed into its next interest rate cut.
"We think we're in the right place to wait and see how things evolve," he said. "We don't feel like we need to be in a hurry. We feel like it's appropriate to be patient."
Powell added, "It's not a situation where we can be pre-emptive, because we actually don't know what the right response to the data will be until we see more data."
Despite the uncertainty, US markets closed the day modestly higher, with the S&P 500 Index (SP: .INX) up 0.4% and the tech-heavy Nasdaq Composite Index (NASDAQ: .IXIC) closing up 0.3%.
What can ASX investors expect from the Fed now?
Like it or not, the Fed's interest rate decision in the US tends to have a material impact on the performance of many ASX shares.
So, what can ASX investors expect next from the world's most watched central bank?
According to Oscar Munoz and Gennadiy Goldberg at TD Securities (quoted by Bloomberg):
Despite the lack of new guidance by the FOMC today, we are revising our forecast for monetary policy.
While we maintain our view for the path of rate cuts to end the cycle at 2.50%, we are now shifting the start back to July. We acknowledge significant risks to this view as policy uncertainty remains high and government decisions fluid.
JPMorgan Chase & Co's Michael Feroli believes US and ASX investors will get the next round of rate relief from the Fed in September.
"Even though we heard some hawkish undertones today, we are comfortable looking for our first cut in September," he said. "While the Fed is, and should be, focused on the fragility of inflation expectations, we expect that by late summer, labour-market weakness will prompt a policy response."
Here in Australia, the RBA will announce its next interest rate decision on 20 May. The official cash rate Down Under stands at 4.10%.
The RBA cut rates for the first time in this cycle by 0.25% at its February meeting. The RBA left the cash rate on hold at its April meeting.
