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Video: CIO's Sundeep Gantori on tech EPS revisions following first-quarter earnings results (02:32)

No change is likely from the Federal Reserve’s policy committee today; both our forecast and market consensus point to a hold at the current benchmark lending range of 4.25-4.5%.

However, the Fed does face a changed backdrop since its last meeting in March. President Trump’s early-April “Liberation Day” tariff rollout has sharply increased effective import duties, especially on Chinese goods. First-quarter US GDP contracted by 0.3% quarter on quarter, with a surge in pre-tariff imports dragging down headline growth. Several large US companies have warned that tariffs will hit earnings, and some have withdrawn guidance altogether. The Fed's independence is again under scrutiny after Trump briefly threatened to remove Chair Jerome Powell over policy disagreements before stepping back. These headline risks have driven elevated Treasury volatility: The 10-year yield swung in a 70-basis-point range through April—the largest since the Silicon Valley Bank crisis in March 2023—though the net monthly change was just 3bps.

With no updates to the Fed’s forecasts or “dot plot” this meeting, investors will focus on Chair Powell’s press conference for signals on how the central bank sees Trump’s trade policy impacting inflation and growth.

We expect the Fed to maintain a wait-and-see approach, seeking greater economic and policy clarity before making any major policy moves. However, decisions going forward are likely to be made on a meeting-by-meeting basis as the situation evolves:

The US economy remains resilient, and corporate earnings are holding up. Despite the first-quarter GDP contraction, underlying growth was stronger than the headline suggests: Consumption rose 1.8% and fixed investment 7.8%, both solidly positive. We expect US GDP growth to slow to around 1.4% this year (down from 2.8% last year), with a full-blown recession likely to be avoided if trade deals progress and tariffs ease from peak levels. Recent data has also weakened the case for urgent rate cuts: Nonfarm payrolls rose by 177,000 in April (versus 130,000 expected), and the unemployment rate held at 4.2%, both pointing to a well-balanced, near-full employment labor market. First-quarter corporate profits, meanwhile, have exceeded expectations—over 75% of S&P 500 companies have reported and profits look likely to have grown 9%, well above our 5% forecast.

The Fed may lean more heavily on scenario planning. With concerns rising around the impact of tariffs on both growth and inflation, the central bank’s policy options look more constrained in the near term. While Powell in March suggested “transitory is the base case” for tariff-linked inflation, he has since described the tariffs as “significantly larger than anticipated,” indicating a tighter focus on inflationary risks. Governor Waller has outlined an outcome-based approach that could point the way forward: A slower, more gradual policy response if the effective tariffs are less severe, or a sharper and faster rate-cutting cycle if we see more severe effective tariffs that push up unemployment.

More tariff clarity is coming. We believe the Fed—and investors—may not have to wait long for more clarity on effective tariff rates. This weekend’s Geneva talks between senior US and Chinese officials look like a meaningful step toward deescalation and further confirmation that we are past peak pessimism on US-China trade. The broader moderation of the Trump administration’s maximalist tariff stance in response to elevated market turbulence also suggests sensitivity to market stress. With many countries expressing a desire to negotiate on tariff policy, and the administration under pressure to show progress, we expect a range of deals or sector carveouts to materialize within the 90-day pause period.

So, our base case remains for 100bps of Fed rate cuts this year starting in September, though we acknowledge a broad range of outcomes is possible depending on how trade policy evolves. Against this backdrop, we continue to advocate seeking durable income: US Treasuries can offer diversification and should perform well if economic growth slows, while complementing quality bonds with select short- and medium-duration riskier credit investments, such as high yield, emerging market bonds, or senior loans, can enhance diversification and potential returns.

As tariff uncertainty likely eases in the coming months and deals emerge between the US and its trading partners, we see scope for US equities to rally as interest rates fall. In our base case, we forecast the S&P 500 to reach 5,800 by year-end. Phasing into the market can be an effective way to position for potential medium- and longer-term gains while managing timing risks. Capital preservation strategies can help manage near-term risks of market declines.