How the Fed’s Hold on Rates Is Affecting Stock, Bond, and Commodity Markets

On May 7, 2025, the Federal Reserve of the United States (Fed) announced its decision to maintain the target range for the federal funds rate unchanged, placing it between 4.25% and 4.50%. This decision marked the third consecutive meeting in which the Fed opted not to modify interest rates, after having implemented three cuts at the end of the previous year.

Prior to this announcement, market expectations were diverse. Many analysts and investors anticipated that the Fed might consider rate cuts over the course of 2025, driven by signs of moderation in inflation that had followed the pandemic period. However, these expectations were significantly influenced by the imposition of tariffs by the Trump administration, a factor that introduced a considerable level of uncertainty into the economic outlook and the direction of monetary policy.

Despite the initial expectations of cuts, the general market consensus leaned towards maintaining rates at the May meeting.

This article aims to analyze in depth the reasons that led the Federal Reserve to make this decision to maintain interest rates, as well as to examine the implications that this measure has for the various financial markets and the assets that are most directly affected by it.

Justification for the Fed’s Decision

The Federal Reserve’s decision to keep interest rates unchanged was based on an assessment of the prevailing economic risks, particularly those related to the possibility of an increase in both inflation and unemployment. The Fed noted that the risks of simultaneously experiencing higher inflation and higher unemployment had increased, an unusual combination that placed the central bank in a delicate situation.

In a press conference after the decision, Chairman Powell indicated that the U.S. economy was in a solid position at that time, which allowed the Fed to adopt a wait-and-see stance before taking any further action regarding interest rates.

The Federal Open Market Committee (FOMC) issued a statement highlighting that uncertainty surrounding the economic outlook had increased and that the Committee remained attentive to the risks lurking on both sides of its dual mandate, which consists of fostering maximum employment and price stability.

While inflation was considered somewhat elevated, overall economic activity continued to expand at a steady pace, and the unemployment rate had stabilized at a historically low level. The Fed’s priority at this time appeared to be to carefully assess the impact of the imposed tariffs and the growing economic uncertainty, before considering the immediate need to stimulate the economy by reducing interest rates.

The FOMC statement emphasized the "increased uncertainty" and bilateral risks, suggesting that the lack of clarity on the consequences of the tariffs prevented the Fed from acting to lower rates. Such action could have exacerbated inflation if tariffs pushed it upwards, so the Fed preferred to wait for more data to be able to more accurately assess the direction the economy would take.

A crucial factor that contributed to economic uncertainty was the role of tariffs imposed by the Trump administration. These broad tariffs had introduced a considerable dose of uncertainty into the U.S. economy and, therefore, into the central bank’s monetary policy decisions. Chairman Powell explicitly noted concerns about the possibility that Trump’s tariffs could trigger both an increase in inflation and an increase in unemployment.

In his statements, he warned that if the substantial tariff increases that had been announced were sustained over time, they were very likely to generate upward pressure on inflation, a slowdown in the pace of economic growth, and, paradoxically, an increase in the unemployment rate. Tariffs represent a significant external shock that greatly complicates the Fed’s decision-making, as they have the potential to generate inflationary pressures while simultaneously harming economic growth.

By increasing the cost of imported goods, tariffs can directly lead to higher inflation. Simultaneously, by increasing operating costs for businesses and potentially triggering trade retaliation from other countries, tariffs can curb economic activity and job creation. This double threat places the Fed in a difficult position, as traditional monetary policy tools, such as raising or lowering interest rates, may not be effective in addressing both problems simultaneously.

Given this uncertain outlook, the Fed adopted a "wait and see" stance, as expressed by Chairman Powell himself. Powell was firm in his conviction that, given that the economy remained in a relatively favorable condition for the moment, the Fed had the capacity to remain on the sidelines and observe the evolution of events.

He emphasized that he did not feel the need to rush to cut interest rates, given the considerable uncertainty that still prevailed in the U.S. economy, exacerbated by the risk of inflation posed by high import tariffs. The Fed, according to his statements, preferred to adopt a "wait and see" approach due to the lack of clarity on the future trajectory of the economy under the trade policies implemented by the Trump administration.

This stance reflects the priority that the Fed placed on collecting and analyzing additional economic data to more fully understand the true impact of the tariffs before considering any adjustments to interest rates. Powell’s rhetoric emphasized patience and reliance on incoming economic data. This indicated that the Fed did not have a pre-established plan for future rate cuts and that any movement in that direction would depend on how economic data evolved, particularly regarding inflation and employment, in light of the tariff policies implemented.

Stock Market

• The initial reaction of the stock market to the Fed’s decision on May 7, 2025, was mixed, characterized by some volatility, but generally trended upwards in the main indices. After the announcement, Wall Street experienced choppy trading but ultimately managed to close in positive territory. Similarly, following the release of the interest rate decision, U.S. stock markets initially suffered a brief fall. However, this trend quickly reversed, and the markets managed to recover and gain ground. Specifically, the Dow Jones Industrial Average and the S&P 500 index showed positive movements, while the Nasdaq Composite index registered a slight decrease in its quotation.
• This initial reaction, which combined volatility with a positive close, suggests that investors, while acknowledging the existing economic uncertainty, may have interpreted the cautious stance adopted by the Fed as an appropriate measure given the current circumstances. The initial volatility could have reflected uncertainty about the exact timing of future rate cuts. However, the subsequent recovery and the gains observed in the Dow Jones and the S&P 500 could indicate that the market found some comfort in the fact that the Fed did not signal an urgent need to raise rates to combat inflation, despite the risks that had been identified. 
• Investors’ interpretation of this decision focused on the increasing risk of stagflation and the apparent patience shown by the Fed. Wall Street interpreted the Fed’s decision to keep interest rates unchanged as a sign that the U.S. economy might be facing a greater risk of falling into a stagflation scenario, a damaging combination of slow economic growth and high inflation. Ellen Zentner, chief investment strategist at Morgan Stanley Wealth Management, noted that while the Fed still considers the economy to be on a solid footing, it recognizes the existence of an upside risk to both unemployment and inflation, mainly due to the tariff policies implemented.
• In this context, Zentner suggested that the Fed’s future communication would emphasize the need to wait until clearer economic data is available before making any decisions on rates. For his part, Charlie Ripley, senior investment strategist at Allianz (ETR:ALVG) Investment Management, commented that the Fed seemed to show considerable patience compared to other market participants, and that it would likely remain on the sidelines until more evident signs of a weakening of economic activity emerged. There is a growing concern in the market about the possibility of stagflation, which could have negative consequences for the valuations of financial assets. Stagflation, characterized by slow economic growth and high inflation, represents a complex challenge for monetary policy. If the Fed chooses to keep interest rates unchanged due to inflationary pressure generated by tariffs, but economic growth slows simultaneously, corporate earnings could be negatively affected, which in turn could lead to lower stock valuations. 
• The Fed’s decision to keep rates unchanged also influenced the perceived probability of future rate cuts. Following the Fed’s announcement, the market began to anticipate a higher probability that the central bank would decide not to implement interest rate cuts at its next two meetings scheduled for June and July. Matthew Pallai, chief investment officer at Nomura Capital Management, suggested that any intervention by the Fed to lower rates might come too late to prevent a significant economic slowdown. The Fed’s decision to keep rates unchanged has led to a decrease in market expectations regarding the timing of future rate cuts. The "wait and see" stance adopted by the Fed and its explicit recognition of upside risks to inflation have led investors to believe that the Fed will not rush to implement rate cuts. This could have important implications for those assets that are particularly sensitive to interest rates, such as growth stocks, which generally benefit from a lower interest rate environment.

Bond Market

• The bond market’s reaction to the Fed’s decision to keep interest rates unchanged was relatively contained. It is important to remember that bond prices and interest rates have an inverse relationship. When bond yields experience a decrease, the value of bonds already in circulation in the market tends to increase. Conversely, if bond yields increase, existing bonds lose value. The decision to keep rates unchanged likely resulted in relative stability in the short-term bond market, as there was no immediate catalyst to drive a significant movement in yields. Given that the Fed’s decision was widely anticipated by market participants, it is likely that the bond market had already largely priced in this information. However, the persistent uncertainty surrounding the possibility of future rate cuts and the latent risk of higher inflation could generate volatility in bond yields at longer maturities. 
• This decision has direct implications for bond yields and prices. Higher interest rates allow bond investors to obtain a higher return on new issues they acquire. However, the principal value of bonds they already hold in their portfolios tends to decrease in an environment of rising rates. In this context, bonds with shorter maturities or floating-rate bond funds may offer greater protection in a scenario of rising rates. Given the current economic uncertainty, it is considered crucial to maintain a fixed income portfolio that is flexible, well-diversified, and long-term oriented. Bonds continue to play their traditional role within investment portfolios, providing a short-term hedge against potential stock market declines. Bond investors should carefully consider the duration of their holdings and evaluate the possibility of investing in shorter-duration bonds or those with floating interest rates to mitigate the risk associated with fluctuations in interest rates in an economically uncertain environment. While rates remain unchanged for the moment, the possibility of future rate hikes due to tariff-driven inflation remains a latent concern. Longer-duration bonds are more sensitive to changes in interest rates, so reducing exposure to these or opting for floating-rate bonds, whose rates are adjusted periodically, can help protect the value of the investment portfolio. 
• The sensitivity of bonds to interest rate variations is measured through a concept known as duration. Duration is an indicator that quantifies how a bond’s price reacts to a change in interest rates. Generally, the further away a bond’s maturity date, the greater its duration and, therefore, the greater the potential variation in its price in response to interest rate movements. In the current environment, characterized by uncertainty, maintaining exposure to intermediate-duration bonds, that is, with maturities between three and five years, could offer an attractive balance between the yield that can be obtained and the potential for total investment return. Duration management stands as a key element in fixed income investing, especially in a context where future Fed decisions are uncertain. By understanding the duration of the bonds that make up their portfolios, investors can more accurately assess the potential impact of interest rate changes on their investments. Opting for an intermediate duration can provide an adequate balance between the pursuit of yield and the mitigation of rate sensitivity.

Currency Market

• The Fed’s decision had an immediate impact on the value of the U.S. dollar, causing the currency to strengthen. Following the Fed’s announcement, the U.S. dollar experienced an increase in its value. This reaction aligns with the general principle that when prices experience an overly rapid increase and inflation exceeds the target set by the Fed, the central bank tends to raise interest rates. This measure makes borrowing costs more expensive throughout the economy, which in turn usually results in a stronger U.S. dollar, as it makes the United States a more attractive destination for international investors to deposit their capital. Generally, an increase in interest rates tends to increase the value of a country’s currency. The Fed’s decision to keep rates unchanged, along with its cautious tone regarding inflation, contributed to the strengthening of the U.S. dollar. The expectation of higher interest rates or the absence of expected cuts often attracts foreign capital, which increases the demand for the local currency and, consequently, its value. The Fed’s stance of not rushing to cut rates was likely interpreted by currency markets as a supporting factor for the dollar. 
• The relationship between interest rates and exchange rates is fundamental in financial markets. Generally, when a country raises its interest rate, its currency tends to strengthen, while a rate reduction usually leads to a weakening of the currency. When a central bank, such as the U.S. Federal Reserve, decides to increase interest rates, commercial banks must pay more for the money they borrow, a cost that is then passed on to consumers, making loans more expensive. This makes the currency more costly and, therefore, reduces the amount of money available to consumers, which decreases the money supply. However, the higher interest rate also makes the currency more attractive for saving and investing in assets denominated in that currency, such as savings accounts and government or corporate bonds. This increased demand, combined with a more limited supply, boosts the value of the currency in question. Interest rates and inflation are intrinsically linked, and both exert a significant influence on exchange rates between currencies. The decision to keep rates unchanged indicates a monetary policy stance that, while not restrictive at the margin, is also not clearly expansive, which contributes to relative stability or a slight strengthening of the dollar. If the Fed had signaled imminent rate cuts, this could have weakened the dollar by reducing the attractiveness of assets denominated in this currency. By keeping rates unchanged and emphasizing concern about inflation, the Fed avoided this outcome.

Equities (Stocks)

• Within the equity market, there are sectors that are particularly sensitive to interest rate decisions, including the technology, real estate, and financial sectors, among others. Sectors that tend to be more sensitive to interest rates, such as utilities and real estate, experienced losses at the end of 2024, in a context of rising Treasury bond yields. Smaller companies generally have higher levels of debt compared to large corporations, which means they have felt the impact of elevated interest rates more pronouncedly and, therefore, could benefit more from a reduction in them. In particular, the real estate and financial sectors appear to present potentially attractive opportunities in the current environment. The financial sector has historically been one of the most sensitive to variations in interest rates. Entities such as banks, insurance companies, and brokerage firms typically experience an increase in their profit margins when interest rates rise. Growth sectors, such as technology, and sectors with a high level of leverage, such as real estate and small businesses, are especially sensitive to interest rate decisions. The financial sector, on the other hand, can benefit from stable or slightly higher rates. Growth companies often rely on borrowing to finance their expansion, so higher interest rates increase their costs and can affect their earnings. Real estate companies also rely heavily on debt financing, and higher rates can cool the housing market. On the other hand, banks and other financial institutions can benefit from wider interest margins when rates are stable or increase. 
• The decision to keep rates unchanged has a direct impact on corporate earnings and company valuations. When interest rates rise, it also becomes more expensive for companies to obtain capital. For example, they will have to pay higher interest rates on the bonds they issue. This can have a negative effect on the company’s future growth prospects, as well as its short-term earnings. Rising interest rates generally lead to higher borrowing costs for companies, which can reduce their profit margins and curb their growth. This particularly affects growth stocks, such as technology companies, which rely on borrowing to finance their expansion. The decision to keep rates unchanged could provide temporary relief to companies with high levels of debt, but uncertainty about future increases or the persistence of high rates could continue to negatively affect their earnings and valuations. While rates did not increase at this meeting, the Fed’s concern about tariff-driven inflation suggests that rates could remain elevated for longer or even increase in the future. This would continue to put pressure on corporate earnings, especially for highly indebted companies. 
• Equity investors should consider certain factors in the current environment. Experts generally do not recommend making drastic changes to investment strategy simply because the Fed has decided to keep rates unchanged. A pause in rate hikes does not necessarily have to be interpreted as negative. In fact, many investors anticipate that rate cuts will occur over the course of 2025, which could act as a driving factor for the U.S. economy. Equity investors should focus on careful selection of individual securities and maintaining a well-diversified portfolio, rather than overreacting to the Fed’s decision to pause its rate policy. The prospect of future rate cuts could still be a significant supporting factor for the stock market in general. Given that the Fed’s decision was widely expected and the market had already largely priced it in, a drastic revision of investment strategies is not warranted. Investors should continue to focus on the fundamentals of individual companies and maintain diversified portfolios to manage the inherent volatility of the market.

Fixed Income (Bonds)

• Within the fixed income market, there are various types of bonds that are affected differently by the Fed’s decisions, including government bonds and corporate bonds, among others. Bond prices and interest rates have an inverse relationship. Generally, the longer the maturity of a bond, the greater its sensitivity and, therefore, the more its price will fluctuate in response to changes in interest rates. Other types of bonds, such as corporate bonds and mortgage-backed bonds, may experience different impacts due to additional factors such as the credit risk associated with the issuer. Government bonds, due to their lower-risk nature, are particularly sensitive to changes in interest rates. When rates fall, government bond prices tend to rise the most, as they are considered the safest investments in the market. Long-term government bonds are the most sensitive to changes in interest rates, while corporate bonds and mortgage-backed bonds may be influenced by additional factors such as the issuer’s credit risk. The decision to keep rates unchanged implies that long-term government bond prices likely did not experience significant immediate movements. However, uncertainty about future rate movements remains a risk factor for these bonds. 
• In the current context, it is essential for investors to adopt strategies to manage interest rate risk within their bond portfolios. One strategy involves reducing exposure to bonds with long-term maturities, rebalancing equity holdings, and considering investing in sectors that have historically proven to be sensitive to interest rates, such as financials or energy. Another strategy that investors can employ to minimize the impact of a potential rate increase is to reduce the average duration of their fixed income investments. While it may be unsettling to observe negative returns in bond portfolios in an environment of rising rates, maintaining a long-term perspective and reinvesting coupons at higher rates can be beneficial for overall fixed income returns. In the current environment, characterized by uncertainty, exposure to bonds with an intermediate duration, that is, with maturities ranging between three and five years, could offer an attractive balance between the yield that can be obtained and the potential for total investment return. Investors can manage interest rate risk in their bond portfolios by adjusting the duration of their holdings, considering intermediate-duration or floating-rate bonds, and maintaining a long-term perspective. Given that the future direction of interest rates remains uncertain, investors should be proactive in managing the risk of their fixed income portfolios. Diversifying across different types of bonds and durations can help mitigate the impact of any unexpected changes in rates.

Commodities

• The relationship between interest rates, inflation, and commodity prices is complex and multifaceted. Interest rates and inflation often maintain a direct relationship, that is, rates tend to increase as a measure to control inflation. In theory, lower interest rates can lead to a decrease in the volatility of commodity prices, as lower storage costs encourage greater stability in the face of transient shocks. Furthermore, lower rates could increase the correlation between the prices of different commodities if the common shocks affecting them are more persistent than the specific shocks of each one. Empirical studies suggest that the expansive monetary policies implemented in the United States have had an upward impact on the general index of commodity prices, as well as on their individual components. Finally, real interest rates are considered an important influence on the real prices of oil, minerals, and agricultural products. The decision to keep rates unchanged could have a mixed impact on commodity prices. The absence of a rate increase could prevent immediate downward pressure, but the persistent concern about tariff-driven inflation could keep prices elevated. Higher interest rates tend to increase the cost of storing commodities, which can exert downward pressure on prices.
•  However, if tariffs lead to higher inflation, this could boost commodity prices. The Fed’s decision to keep rates unchanged suggests that it does not see an immediate need to cool commodity prices through rate hikes. 
• The potential impact of the Fed’s decision on the prices of different types of commodities, such as agricultural, metals, and energy, may vary. As long as interest rates remain at elevated levels, the effect on agricultural commodity markets is likely to persist, which could translate into reduced trading volumes and continued price volatility. Regarding oil, an unexpected increase in the U.S. real interest rate could generate a modest and short-lived decline in its real price. However, it is important to note that elevated commodity prices have a low probability of significantly affecting core inflation globally or substantially altering the monetary policy outlook in most economies, unless there are substantial increases in prices from current levels. Agricultural commodity prices could continue to experience volatility due to elevated interest rates, while the impact on energy prices could be modest and short-lived. Overall core inflation is unlikely to be significantly affected unless there are substantial increases in commodity prices. The cost of financing and storage affects agricultural products, which could explain the expected volatility. The limited impact on oil and core inflation suggests that other factors, such as global supply and demand, have a more significant influence on these markets.

Currencies

• Interest rates play a crucial role in determining the relative value of currencies in the foreign exchange market. Generally, a country that offers higher interest rates tends to attract greater foreign investment, which increases the demand for its currency and, therefore, its value. Currency markets are constantly monitoring fluctuations in the exchange rates of different currency pairs, and the relative difference in interest rates between countries is a primary factor driving these movements. To strengthen its currency’s exchange rate, a central bank may choose to raise its benchmark interest rate. The decision to keep rates unchanged, while leading to an initial strengthening of the dollar, may not be sustainable if market expectations about future rate cuts change. The value of a currency is influenced by expectations of future interest rates. If the market begins to anticipate rate cuts later in the year, this could exert downward pressure on the dollar, even if rates remain unchanged at present.
• The Fed’s interest rate decision also has important implications for international trade and for investors in the currency market. A country’s trade relationship with the rest of the world is a factor that can influence the value of its currency. Countries that export more than they import generally have stronger currencies compared to those with trade deficits. The exchange rate’s reaction to an inflationary surprise will largely depend on expectations about the central bank’s response to that surprise. Economic models suggest that the correlation between exchange rates and interest rates can vary depending on economic conditions and the nature of the shocks affecting the economy. Currency investors should consider not only the current interest rate decision but also future expectations and global economic factors that could influence exchange rates. International trade, inflation, and expectations about future monetary policy are key factors driving currency movements. The Fed’s decision is just one piece of the puzzle, and investors should consider a broader picture to make informed decisions.

Outlook

The Federal Reserve’s decision to keep interest rates unchanged on May 7, 2025, occurred in a context of elevated economic uncertainty, mainly driven by the potential consequences of tariffs imposed by the Trump administration. The Fed noted an increase in the risks of both inflation and unemployment, which justified a cautious "wait and see" stance.

The impact on financial markets was mixed. The stock market experienced initial volatility followed by modest gains, suggesting that investors, while concerned about the risk of stagflation, accepted the Fed’s justification for maintaining rates. The bond market remained relatively stable, while the U.S. dollar strengthened slightly after the announcement.

Regarding the most involved assets, interest rate-sensitive equity sectors, such as technology and real estate, will closely monitor the evolution of monetary policy. The financial sector could benefit from rate stability. In the fixed income market, duration management remains crucial to mitigate the risk of future rate fluctuations. Commodity prices could experience volatility due to economic uncertainty and the persistence of elevated rates, while the dollar’s value will be influenced by both the Fed’s decisions and market expectations about future rate movements.

Looking ahead, the Fed’s monetary policy will likely continue to depend on the evolution of economic data, especially regarding inflation and employment, and on the clarity that emerges regarding the real impact of tariff policies. Investors and market participants should remain attentive to the Fed’s communications and key economic indicators to anticipate potential changes in monetary policy and adjust their investment strategies accordingly. It is recommended to maintain portfolio diversification and focus on quality assets in an economic environment that continues to present challenges and uncertainties.