Insights 
VT 
The US Federal Reserve decided to keep the policy rate unchanged at 4.25%-4.5% during its May meeting. Economic uncertainty has risen, with potential risks of higher unemployment and inflation noted.
The Fed maintains its current pace of reducing holdings of treasuries and mortgage-backed securities. Despite this decision, the US Dollar remained stable in response to the Fed’s announcement.
Economic Overview
In the economic backdrop, inflation runs slightly above the target, with the unemployment rate steady at a low level. The Fed emphasised the need for further data to determine future policy adjustments.
There is anticipation the Fed might leave rates unchanged for a third consecutive meeting. There is no expected rate cut in May, but a 30% probability for June is considered.
Monitoring developments closely, economic expansion continues at a solid pace amid trade-related challenges. Overall, the Fed remains cautious, opting to observe economic conditions before making further policy shifts.
Following the Federal Reserve’s decision to hold rates steady between 4.25% and 4.5%, the tone from policymakers continues to reflect caution rather than confidence. Powell and his colleagues appear reluctant to shift prematurely, gathering data before leaning in any direction. Inflation still sits uncomfortably above the Fed’s 2% goal, but without clear signals of it warming further, they seem content to watch, not act—for now.
Labour markets remain tight, with unemployment hovering at historically low levels. That said, sustained strength in hiring no longer seems as assured as it did late last year. If the jobs data turns, it may not take more than one weak print to shift expectations, especially when paired with stubborn inflation readings. We’ve seen broad resilience in consumption, but cracks are visible in the form of rising household debt and softer purchasing activity in key sectors.
Market Response
Markets have priced in little chance of a cut this month, and only about one-in-three are betting on one in June. This means the pricing curve is likely to stay shallow unless headline data breaks sharply in either direction. If inflation surprises on the upside, that curve could flatten further, particularly at the short end. Conversely, a weak jobs report could shift odds quickly, and traders might need to rework exposure accordingly.
For now, the Treasury market is showing composure, with longer yields hovering in relatively narrow ranges. Volatility, however, remains a persistent feature in short-term interest rate derivatives. Swaps and futures options are still pointing to uncertainty about Fed direction come late Q2, suggesting caution might be warranted around high-leverage calendar spreads or binary-type positions into the next jobs print and CPI release. These events have recently delivered more impact than the Fed meetings themselves.
Balance sheet reduction is continuing at the current pace, which removes some liquidity from the system. But it doesn’t seem to be raising market stress levels—at least not yet. That said, collateral positioning into quarter-end and any signs of constraint in repo markets should be watched. Funding pressures might creep up with little warning.
Given this posture by the Fed—remaining data dependent but noncommittal—momentum-based strategies may struggle. Instead, premium collection strategies or low-delta directional positioning may perform more favourably. This also implies that short-dated gamma could decay more quickly in sessions absent clear directional data catalysts.
We have seen the US Dollar hold its ground post-decision, which confirms how tightly anchored rate expectations are to current levels. For cross-asset strategies, that stability provides a reference point, but it also means opportunities may be fleeting. Timing around data becomes absolutely key.
Traders relying on options structures tied to volatility spikes should be alert to headline risk, especially given upcoming congressional testimony and potential geopolitical headlines. Looking ahead, adjustment windows may narrow, and positioning too early could cost. It may serve preference to stay light on directional risk until the Fed signals a forced hand.
