Allianz Investment's Chief Investment Officer for public markets, Michael Krautzberger, commented ahead of the US Federal Open Market Committee (FOMC) meeting on April 28-29, indicating that the Federal Reserve is expected to maintain its current policy stance, keeping the federal funds target rate range at 3.50% to 3.75%. This decision is anticipated to receive broad support, with Governor Stephen Miran potentially being the sole dissenting vote in favor of a rate cut. Policymakers still believe there is ample room to wait for further clarity on the economic impact of the Middle East conflict. Recent data shows the US economy remains resilient, with spillover effects on economic activity and inflation so far remaining contained. The labor market is showing signs of stabilization with hiring activity remaining subdued, while initial inflationary pressures from rising oil prices have largely aligned with expectations. However, if the conflict persists and causes prolonged disruptions to shipping in the Strait of Hormuz, energy market supplies could tighten, and corporate input costs may rise, thereby increasing the risk of more pronounced stagflation in the coming months. As this meeting will not include an update to the Summary of Economic Projections or the dot plot, and the policy statement is only expected to see minor adjustments, market focus will shift to Chairman Jerome Powell's press conference, which will be his final public appearance before his term as Chairman concludes on May 15. Powell is expected to acknowledge that the Fed faces more challenging policy trade-offs in the near term: inflation risks are tilted to the upside, while employment risks are skewed to the downside. Simultaneously, he is likely to reiterate the Committee's relatively positive outlook on the medium-term economic prospects, as indicated in the March projections, primarily benefiting from productivity gains driven by artificial intelligence (AI). Political pressure has recently eased. The US Department of Justice has dropped its investigation into Powell, significantly reducing institutional pressure on the Fed in the short term and facilitating Kevin Warsh's expected appointment. Even with a new Fed Chair in the future, a significant shift in monetary policy direction is not anticipated in the near term, as the successor will also need to navigate the trade-offs between slowing economic growth and persistent inflationary pressures while building consensus within the Committee. Against this backdrop, Allianz expects the FOMC to keep interest rates unchanged for the remainder of the year.
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