US Fed meeting: rates to hold steady, dot plot signals fewer cuts

Fed to hold steady but could narrow easing path

As the Federal Reserve begins its two-day policy meeting, markets are fully pricing in no change in the federal funds rate. This outcome has been widely telegraphed, especially after May’s inflation data showed a softer-than-expected increase in both headline and core CPI. However, while the rate itself may remain unchanged, attention has firmly shifted toward the Fed’s Summary of Economic Projections (SEP) and the closely-watched dot plot, which outlines individual policymakers’ expectations for future interest rates.

The consensus among market participants now anticipates only one 25-basis-point rate cut for the remainder of 2025, compared to earlier projections that allowed for two or more. This reflects a more conservative easing path, shaped by a mix of encouraging inflation data and persistent macro uncertainty. While Chair Jerome Powell may attempt to maintain a neutral tone during his press conference, any subtle shift in the dot plot could have a stronger influence on financial conditions.

Soft inflation has certainly strengthened the case for policy patience — the May CPI rose just 0.1% month-over-month and 2.4% year-over-year — but downside risks remain. The reacceleration of commodity prices, particularly oil, due to intensifying geopolitical tensions in the Middle East poses a renewed threat to the disinflation narrative. Meanwhile, uncertainty around the inflationary impact of tariffs, many of which are still under negotiation, further complicates the Fed’s outlook.

Trump applies pressure, markets brace for wider conflict

President Donald Trump’s high-level meeting with his national security team has injected fresh tension into markets, as speculation builds around potential US military involvement in the Israel-Iran conflict. While the US has not officially entered the fray, Tehran’s reported preparation of missile strikes on regional US military bases underscores the rising stakes. A military response from Washington would significantly escalate the conflict, with direct implications for oil markets, risk sentiment, and central bank calculus.

Commodities traders are closely watching Brent crude. Despite recent volatility, the broader trajectory remains upward. Oil markets have historically responded sharply to Middle East escalations, and with the Strait of Hormuz — a key conduit for global oil and gas flows — in focus, energy prices are poised to remain sensitive to further developments. Higher oil prices, if sustained, could reignite inflation fears globally, undermining central banks' cautious optimism.

UK inflation falls, BoE seen holding for now

UK inflation data released this week confirmed a slight cooling in consumer price pressures, with annual CPI falling to 3.4% in May from 3.5% in April. While this aligns with expectations, it is unlikely to prompt immediate easing from the Bank of England. Market-implied odds of a rate cut at this week’s meeting are negligible, with the first full cut now priced for August at around a 75% probability.

The BoE remains in a delicate position. While inflation is clearly trending lower, it remains well above the 2% target, and underlying price pressures — including those linked to wages and services — remain sticky. Moreover, fiscal uncertainties and the threat of imported inflation via rising crude oil prices make the case for holding policy steady in the near term. Traders have reduced expectations for total 2025 easing to just under 50bps, reflecting a more measured outlook.

Risk sentiment remains fragile

Despite easing US inflation data and marginal improvements in trade diplomacy, investor sentiment remains fragile. The backdrop of geopolitical uncertainty — from the Israel-Iran conflict to unresolved tariff negotiations and sluggish global growth — has kept risk appetite contained. The US dollar remains supported by safe-haven demand, although its movement has been muted relative to historical patterns during past crises.

Financial markets will closely scrutinize Powell’s tone and the Fed’s revised projections. According to previews, the Fed may lift its 2024 inflation estimate to 3%, while trimming GDP forecasts slightly to around 1.5%. The unemployment rate may also edge higher in the new projections. These adjustments, though subtle, will be read as signals about the Fed’s comfort level with the current policy stance and its tolerance for risk.

A hawkish tilt — even a modest one — could strengthen the dollar and weigh on equity markets, which remain sensitive to shifts in liquidity expectations. With the S&P 500 hovering near all-time highs, and bond markets cautious, any surprise in Powell’s messaging could trigger a repositioning across asset classes.

With geopolitical risks rising and inflation trends offering mixed signals, the Federal Reserve is expected to stay on hold this week. However, the market’s focus has shifted toward forward guidance — particularly how the Fed balances softening inflation data with the risk of renewed price pressures from external shocks. A reduction in projected rate cuts, even from two to one, could re-anchor expectations and firm the dollar’s recent rebound.