As expected, the Fed held rates steady at 4.25-4.50%, with two dissents in favour of a cut. This marks the most dissents in over three decades.
The Fed continues to flag inflationary risks stemming from tariffs. While the labour market remains resilient, the Fed reiterated that any policy shift will remain data-dependent.
We see some risks in the softening of the US labour market, particularly some indication of a moderation in private hirings and a downtrend in wage growth.
While inflationary risks persist, the Fed will likely wait for clearer hard data before pivoting to easing. However, we believe signs of labour market softening could tip the scale. We continue to pencil in two rate cuts this year, likely in September and December.
The perceived increasingly hawkish tone from the Fed may lend near-term support to the USD and put some pressure on the Ringgit.
We see limited impact of the latest FOMC decision on the OPR outlook, as BNM remains focused on supporting domestic growth amid external trade headwinds.
Fed kept policy rate steady
As expected, the Federal Reserve maintained the federal funds target range at 4.25–4.50%. This marks the fifth consecutive pause since the last 25-bp cut in December 2024. The hold decision came with a 9–2 vote, with Governors Michelle Bowman and Christopher Waller dissenting in favour of a cut. This marks the largest dissent among Fed board members in over three decades, reflecting the balancing act between containing inflation and cushioning against labour market softening.
Fed sees inflation as a key concern
The Fed’s latest decision to hold was guided by its assessment that inflation “remains somewhat elevated relative to our 2% longer-run goal” and that the labour market is “broadly consistent with maximum employment.” Chair Jerome Powell reiterated the Fed’s cautious stance, warning that the increased tariffs are “pushing up prices in some categories of goods,” adding uncertainty to the inflation trend. He emphasised that the Fed is walking a fine line on the timing of policy shifts. He stated that “If you move too soon, you may not get inflation fixed,” but also noted, “If you move too late, you might do unnecessary damage to the labour market.” His remarks underscores that any rate cut remains largely data-dependent.
Fed’s projections underscore mounting downside risks
The Fed’s baseline outlook remains clouded by uncertainty. In its June FOMC meeting (no projections are released in the latest July meeting), the Fed revised down its YoY real GDP growth forecast to +1.4% in 2025 (from +1.7%) and +1.6% in 2026 (from +1.8%). The unemployment rate projections were adjusted higher to 4.5% in both 2025 and 2026 (from 4.4% and 4.3% respectively). Meanwhile, the Fed lifted its inflation forecasts to +3.0% in 2025 (+2.7% previously) and +2.4% in 2026 (+2.2% previously), with core inflation similarly revised up to +3.1% and +2.4% respectively (from +2.8% and +2.2% respectively). The adjustments reflect heightened concern over how trade tariffs and geopolitical tensions may affect both inflation and growth outlook. The next Summary of Economic Projection from the Fed will be released in its September FOMC meeting.
Risks of a softening labour market remain
We view that the Fed’s downgraded projections partly reflect the fluid US labour market conditions, which has shown a mixed picture. The unemployment rate has held steady at 4.1–4.2% in recent months, still below the pre-Covid five-year average of around 4.4% (2015–2019). While headline non-farm payrolls beat expectations in June, rising by 147k (consensus: 106k; May: 144k), the strength was largely driven by a jump in government hiring. State and local government jobs rose by 73k (May: 7k), boosted by seasonal hiring in the education sector following the end of the school year. In contrast, private-sector hiring slowed to just 74k (May: 137k), the weakest since October 2024 amid a broad-based moderation across sectors. Wage growth has also continued to ease. The Bureau of Labor Statistics’ average hourly earnings for private-sector workers moderated to +3.7% YoY in June (May: +3.8%; end-2024: +4.0%), pointing to softness in the private sector.
Two rate cuts still on the cards
While inflationary risks persist, the Fed is likely to take a cautious approach, waiting for clearer hard data before pivoting to easing. However, we believe signs of labour market softening and its potential drag on consumer spending could tip the scale. We thereby continue to pencil in two rate cuts this year, likely in September and December, conditional on inflation staying broadly stable and labour market cooling further.
No changes to BNM OPR outlook
While the Fed’s latest decision was largely within expectations, markets have trimmed their rate cut projection to just one in 2025 (from two cuts previously), likely due to a perceived increasingly hawkish tone from the Fed. This may lend near-term support to the USD and put some pressure on the Ringgit, which has appreciated about 5% year-to-date on broad dollar weakness. That said, we expect USDMYR to remain steady, underpinned by stable BNM policy. We see limited impact of the latest FOMC decision on the OPR outlook, as BNM remains focused on supporting domestic growth amid external trade headwinds.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.213466 | 4.244897 |
| EUR | 4.946298 | 4.953651 |
| CNY | 0.592866 | 0.593738 |
| HKD | 0.540491 | 0.544550 |
| SGD | 3.282193 | 3.306905 |