US Fed meeting: Interest rates may stay unchanged; should you adjust your investment strategy?

US Fed meeting: Against the backdrop of global uncertainty due to the trade war, slowing growth, unstable inflation trends, and vocal criticism of Chair Jerome Powell by President Donald Trump, the US Federal Reserve will announce its monetary policy on May 7.

The US Federal Reserve is widely expected to hold the interest rates even though macroeconomic indicators are flashing warning signs.

The US GDP contracted at a 0.3 per cent annualised rate in the first quarter of 2025. US manufacturing contracted for a second straight month in April. The ISM's manufacturing PMI dropped to a five-month low of 48.7 in April from 49.0 in March.

However, the central bank may take comfort from the fact that inflation is easing and the job market looks healthy.

April payrolls jumped 1,77,000, while the Fed’s favoured inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, was unchanged in March after advancing 0.4 per cent in February. Year-on-year, PCE prices increased 2.3 per cent after rising 2.7 per cent in February.

US Fed to stay in 'wait and watch' mode

Experts believe that the Federal Reserve will maintain benchmark rates as inflation remains above the central bank's 2 per cent target range.

"We expect the US Federal Reserve to maintain a pause on policy rates. This anticipated status quo is influenced by several factors: the potential inflationary feedback from recent US tariff hikes, persistent fiscal deficits, and a still-resilient labour market. While inflation has moderated and growth forecasts have softened, the Fed is likely to adopt a cautious stance—especially amid political pressures to ease rates," said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group.

Madhavi Arora, Lead Economist at Emkay Global, said: "We expect the upcoming FOMC to keep policy rates unchanged amid elevated uncertainty, tariffs, rising inflation expectations and a deterioration in household and business sentiment, with Powell signalling no rush to cut rates."

Anil Rego, the founder and fund manager at Right Horizons PMS, also believes the US Federal Reserve will maintain its interest rate stance for the time being, reflecting persistent inflation concerns and a still-strong labour market, although uncertainties around trade policies, particularly Trump's tariffs, complicate the outlook.

Rego highlighted that rate cuts are expected only if the labour market weakens significantly or if inflation falls steadily toward the Fed's 2 per cent target. For now, the central bank is opting for caution, and markets anticipate the first rate cut in July, with more cuts possible in the second half of 2025 depending on economic developments.

Should Indian investors adjust their investment strategy?

Experts do not recommend any major shift in investment strategy even if the US Fed keeps rates unchanged. They do not recommend any change in investment strategy solely in response to a Fed pause.

"A pause is not necessarily negative. If anything, it signals that the Fed is not overly concerned about a deep or prolonged US recession. Moreover, this outcome is largely priced in by global financial markets, and hence, we do not expect any meaningful disruption in the Indian equity market stemming from this decision," said Hajra of Anand Rathi Group.

"Investment strategies should not hinge on binary global policy outcomes, particularly those that are widely anticipated. Market timing based on foreign central bank actions tends to be reactive and may introduce more noise than value. India's macro fundamentals, corporate earnings trajectory, and domestic policy support remain the primary drivers of equity performance," Hajra said.

According to Trivesh D, COO at Tradejini, for Indian markets, a pause isn’t necessarily negative, it is already priced in. But any delay in rate cuts beyond June could spark volatility, especially in rate-sensitive sectors like IT and banking. If yields in the US remain elevated for longer, it might keep FII flows under pressure in the short term.

From an investment standpoint, Trivesh does not suggest a major shift in strategy.

"Investors should avoid chasing short-term noise. The broader macro trend for India remains strong, with domestic demand and earnings growth providing a cushion. But being that little bit more selective in big-cap and domestic consumption plays could help navigate global uncertainty. Essentially, remain invested, stay alert, but don’t overreact," said Trivesh.

Rego of Right Horizons PMS highlighted that the Indian stock market generally benefits from the status quo on US rates, as it supports capital inflows and rupee stability.

He added that sustained foreign investments in Indian equities, especially in sectors linked to domestic demand like banks, infrastructure, and consumer discretionary, may benefit them.

However, caution is warranted in export-oriented sectors, as global trade uncertainties could weigh on earnings.

"While no immediate changes are necessary, a slight tilt towards defensive and quality growth stocks is recommended, especially given the volatile global environment," said Rego.

Mohit Khanna, CFP®- Fund Manager at Purnartha PMS, underscored that a status quo in the US interest rate trajectory should not have any major impact on the Indian markets, even from the FIIS’ perspective. The bigger event is tariff policy implementation, and markets are focused on that.

"I would not recommend any change. Investors should continue to hold a diversified multi-asset portfolio. Stock selection is more important than sector selection now. Therefore, I advise a fundamental research-driven bottom-up stock selection process for building a portfolio," said Khanna.

Experts suggest that the prudent investment approach is to stay aligned with long-term asset allocation plans while focusing on India’s structural growth story.

Read all market-related news here

Read more stories by Nishant Kumar

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.