Fed holds rates, but RBA still poised for a cut

The US Federal Reserve left interest rates on hold when it met overnight as it takes a "patient" stance while it awaits the inflationary impacts of US President Donald Trump's tariffs.

The Fed noted that "uncertainty about the economic outlook has increased" and the central bank was watching the situation closely.

"In some ways it appears that the Fed is concerned at repeating the mistakes of the 1970s 'stagflation-heavy' environment where a premature easing of monetary policy, while inflation remained elevated, led to an extended period of economic dislocation, including high inflation, low growth and high unemployment," GSFM investment specialist Stephen Miller said.

"While the current period is some distance from the 1970s experience, the lesson nevertheless is that it is not best practice to accommodate supply shocks, even if they are expected to be transient."

Miller added that "sticky" inflation has robbed the Fed of the flexibility to cut rates quickly, however Federal Reserve chair Jerome Powell still asserted that the US economy is holding up relatively well despite the uncertainty.

Focusing on what this means for the Reserve Bank of Australia (RBA), Miller is anticipating a 25 basis point cut when the board meets towards the end of this month.

"The March quarter consumer price index (CPI) was a good enough result for a 25 bp policy rate cut at the next RBA meeting on May 19-20, but that is about it," Miller said.

"...expectations in some quarters for a 50bp policy rate cut seem 'a bridge too far'."

Miller said the main concern facing the economy is the impact of Trump's tariffs, which could lead to a global recession.

"The upending of the global trade system occasioned by the Trump Administration's tariff agenda will more likely than not see a global recession by year-end," he said.

"That prospect, combined with perhaps some 'over-achievement' on inflation relative to the current RBA projection, may mean that we do get successive policy rate reductions at future RBA board meetings despite the understandable unwillingness of the [RBA] governor [Michele Bullock] to pre-commit to such a path.

"Australia's eschewal of retaliatory tariff measures may give the RBA a less complicated path to attacking the consequences of a global trade war."