Asian markets exhibited caution on Thursday following the US Federal Reserve's decision to maintain its key rate and its reiteration that it is in no rush to lower rates. The US central bank has highlighted the risks of higher unemployment and inflation, casting a shadow over the economic outlook. The Fed's stance comes after President Trump's tariff announcements, leading officials to maintain rates at their current level until the economic direction becomes clearer.

James Egelhof from BNP Paribas noted the FOMC's comfort in remaining on hold unless US economic data decisively shifts. Investors are also awaiting trade talks between the US and China. The MSCI Asia ex Japan index showed gains of over 0.5 per cent.

Market performance across Asia was mixed, with Hong Kong's Hang Seng leading with gains exceeding 1 per cent. Japan's Nikkei and South Korea's Kospi saw modest gains, while Singapore's Straits Times experienced a slight drag. On Wednesday, May 7, the US Federal Reserve decided to keep interest rates unchanged, despite calls from President Trump to lower borrowing costs, citing increased risks of unemployment and inflation.

The US Federal Reserve has decided to keep interest rates steady at 4.25 to 4.50 per cent, adopting a cautious approach amidst rising inflation and unemployment risks. The decision, made at the latest FOMC meeting, occurs despite indications of solid US economic growth and a stable job market. The Fed will closely monitor economic data before making further decisions.

Madhavi Arora from Emkay Global Financial Services noted that the Fed is in a wait-and-see mode, describing balanced risks of higher unemployment and inflation. The Fed appears to be looking past the first-quarter GDP contraction, describing growth as “solid” at the start of the year. Powell underscored the increasing risks and the need to remain data dependent, referencing 'waiting' over 20 times.

Arora also highlighted Powell’s subtle tilt toward controlling inflation over employment. This acknowledges stagflationary risks stemming from trade policy. The Fed may remain on hold until clear signs of weakening in the labour market emerge, potentially delaying policy easing to September. The market is still pricing in three 25 basis point cuts in 2025.

On the global front, while the Fed faces supply-side inflation pressures due to tariffs, central banks in Europe and Asia are leaning toward rate cuts. The ECB is expected to diverge from the Fed by easing this quarter, while China continues its easing bias. This allows emerging market central banks, including the RBI, more room to manoeuvre on policy rates.

Arora suggests that the RBI’s terminal rate could settle at 5.25 per cent (+/-25bps) in this cycle, depending on the global slowdown. India has outperformed in sovereign debt markets this year, with 10-year yields easing around 44bps.

The US Federal Reserve has decided to keep interest rates unchanged at 4.25 per cent to 4.50 per cent, as the risks of both higher unemployment and rising inflation have increased, according to ANI reports. The FOMC meeting held on Wednesday local time took the decision after reviewing the latest economic data. The Fed stated that the risks of higher unemployment and higher inflation have risen and decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.

Recent indicators suggest that the US economy continues to grow at a solid pace, and the job market remains strong. However, inflation is still somewhat high and above the Fed's target of 2 per cent. The Fed will continue to reduce its holdings of Treasury securities and mortgage-backed securities and will carefully watch new economic data to decide when and how to adjust interest rates in the future. The central bank is ready to change its policy if needed, considering factors such as labor market conditions, inflation trends, financial markets, and global developments.

All members of the Committee, including Fed Chair Jerome Powell and Vice Chair John Williams, voted in favor of the decision. The Fed remains committed to bringing inflation down to 2 per cent while supporting a strong labor market and is holding steady as it watches how the economy evolves.