The Fed Holds the Line

• The Fed is expected to leave interest rates unchanged.

• Concerns around employment gains are likely to weigh

• Expect the economic outlook forecast to remain unchanged.

The Federal Reserve’s monetary policy path should remain neutral…

Today brings a much-anticipated catalyst for investors across the globe. The Federal Reserve is set to release its last monetary policy decision. Wall Street expects no change, leave the federal funds target in a range of 3.50 to 3.75%.

But the lack of adjustment isn’t the story — it’s already priced in. What matters most is the Fed’s outlook on monetary policy moving forward. As you can see in the following table, the bond market isn’t pricing in an interest‑rate cut or hike anytime soon. That’s very different from expectations back in December, when investors anticipated two more rate cuts by year‑end.

As a result, the most anticipated release tomorrow will be the Summary of Economic Projections (“SEP”). It will show where policymakers believe the path of interest rates is headed over the next few years. The details will indicate the pace of policy easing by year‑end and whether Wall Street’s current assumptions are correct.

Based on recent comments from Chair Jerome Powell, the Fed’s outlook should remain neutral to dovish when forward guidance is released. He has said policymakers are willing to look beyond the recent jump in oil prices, as long as it’s not long‑lasting. Don’t be surprised if the data endorses that sentiment when the quarterly projections are released. That should underpin the outlook for economic growth and a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

The Federal Open Market Committee (“FOMC”) meets eight times a year to set rates. It’s made up of seven Board members and five rotating regional bank presidents — twelve voting members in total. But once a quarter, all nineteen officials (including non‑voting district presidents) submit their forecasts for key economic indicators. These are aggregated and released in the SEP.

Here’s what they projected at the March meeting…

Compare that to where we are currently: GDP is tracking close to 1.2%, unemployment sits at 4.3%, PCE inflation is 2.8%, and core PCE is 3%. The fed funds rate is currently 3.6%. Most of the projections aren’t far off, but the rate path is likely to remain neutral to dovish for three key reasons: weak employment, slow growth, and the balance‑sheet transition.

The Labor Market

So far this year, employment gains have remained weak. The U.S. Bureau of Labor Statistics said businesses added 178,000 new workers in March. While that was a vast improvement compared to the loss of 133,000 workers in February, the result was still far below the typical March gain of 264,000 over the last decade.

To make matters worse, March wasn’t the only month this year that saw below‑trend hiring. It was a similar story in January and February. Typically, the first quarter is one of the best times of the year for individuals to find work. The early results mean the economy must play a lot of catch‑up if hiring is going to come anywhere close to the 228,000 monthly average since 2015.

Fed officials continue to voice concern about the labor market. San Francisco’s Mary Daly has been worried about job weakness since last summer. Governor Christopher Waller continues to warn that a deterioration in hiring remains a substantial risk. And the minutes of the March meeting showed broad committee‑level concern.

And while most officials have said they won’t stay on hold forever if oil prices keep rising, the consensus is that they can ride this out. So a rate cut today is likely a foregone conclusion.

The Balance Sheet

At the December policy meeting, the Fed ended quantitative tightening (“QT”) and shifted back toward expanding the balance sheet. Policymakers said they would still let mortgage‑backed securities mature and hold onto the cash. However, they will begin reinvesting the proceeds of maturing Treasury securities to ensure banking reserves don’t become scarce.

Fed officials were worried about liquidity in overnight lending markets. Governor Waller and others have warned that too low a level of reserves could push interbank rates above the Fed’s target range. That would undermine monetary stability.

Through the first months of 2026, the New York Fed has been executing Reserve Management Purchases, buying roughly $40 billion worth of Treasurys per month. Yet officials have already signaled that this rhythm will slow once the April tax season is behind us.

While the Fed avoids naming a hard target, policymakers have repeatedly hinted at an unwritten floor of roughly $3 trillion in reserves — a level they view as sufficient to keep markets calm and repo rates anchored. Bank reserves currently sit at $2.915 trillion.

The Fed pivoted to give itself more flexibility around policy and to manage liquidity more precisely. Short‑duration Treasury yields set the benchmark for short‑term borrowing costs across the economy. That stimulates growth and encourages hiring. Any commentary about continuing those purchases should be a positive.

Economic Outlook

A handful of Fed officials have recently discussed growth risks. New York Fed President John Williams has been the most direct, warning twice in April that the Iran conflict is already dampening activity. He still believes growth should hold up and inflation will ease by year‑end, but he noted that the Fed can’t ignore the risks.

Jerome Powell has been more measured. In late March he called the current environment “challenging,” especially for new labor‑market entrants. He emphasized that the Fed must watch whether supply shocks spill into something more damaging. It wasn’t a recession call, but it was a clear acknowledgment that the growth backdrop is softer than the headline data implies.

St. Louis Fed President Alberto Musalem recently said the economic outlook is “highly uncertain.” He noted that risks are tilting toward a weaker labor market and slower growth even as inflation remains above target. While his baseline still assumes growth near potential, he stressed that alternative, weaker outcomes are increasingly plausible.

None of these comments sound like individuals who see a need for an imminent rate hike.

Bringing It All Together

As I said at the top, the lack of change to rates isn’t the story. It’s the Fed’s evolving stance that will drive market expectations. If the SEP confirms a steady outlook for rates, it signals that borrowing costs should remain stable. That holds the line for households and businesses on borrowing, investing, and spending. That should underpin economic growth, stabilize employment, and support a steady rally in the S&P 500.

Five Stories Moving the Market:

NXP Semiconductors gave an upbeat revenue forecast, a sign the chipmaker is bouncing back from a prolonged auto industry slump and tariff uncertainties; the company expects momentum to accelerate through the remainder of 2026 – Bloomberg. (Why you should care – analog customers have largely worked off an inventory glut that was on the heels of the COVID pandemic)

Visa beat Wall Street’s profit estimates as the world's largest payment processor benefited from a steady rise in payment ​volumes despite ongoing macroeconomic uncertainty; payments volume, a gauge of overall consumer and business spending on Visa's ​network, jumped 9% in the second quarter – Reuters. (Why you should care – management said growth was broad based while announcing a new $20 billion share buyback)

President Donald Trump said Iran has asked the U.S. to lift a naval blockade of the Strait of Hormuz while the two sides negotiate an end to the two-month war; Trump also said the country’s leadership is in a state of collapse – Bloomberg. (Why you should care – Pakistani mediators said they anticipate Iran will submit a revised proposal to end the conflict in the coming days)

The United Arab Emirates said it was quitting OPEC, dealing a blow to the oil producers' group ​as an unprecedented energy crisis caused by the Iran war exposes discord among Gulf nations – Reuters. (Why you should care – the UAE holds the world’s sixth largest oil reserves; the shift gives it ability to bring more supply to market at whatever price it deems fair)

American consumers are spending less on goods like clothing, furniture and sports equipment, while spending more on some services and experiences, like travel and healthcare; the latest consumer-spending data from the Bureau of Economic Analysis, which runs through February, shows that many of the goods for which prices have risen fastest are the same ones for which spending, adjusted for inflation, is falling most – WSJ. (Why you should care – this is a sign that economic growth is still holding up)

Economic Calendar:

Earnings: ABBV, AMZN, AZN, EQIX, GD, GOOGL, GSK, KLAC, META, MSFT, QCOM

Australia – CPI for Q1

Spain – CPI for April (3 a.m.)

Eurozone – Private Sector Loans for March (4 a.m.)

Eurozone – Consumer Inflation Expectations for April (5 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

Germany – CPI for April (8 a.m.)

U.S. – Building Permits, Housing Starts for March (8:30 a.m.)

U.S. – Retail, Wholesale Inventories for March (8:30 a.m.)

Bank of Canada Monetary Policy Announcement (9:45 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

BoC’s Macklem (Governor) Speaks (10:30 a.m.)

Treasury Auctions $70 Billion in 5-Year Notes (1 p.m.)

Federal Reserve Monetary Policy Announcement (2 p.m.)

Fed’s Powell (Chair) Speaks (2:30 p.m.)