We expect the Federal Reserve to keep the Fed Funds Rate target range unchanged at 4.25% to 4.50%, consistent with market consensus and well above the Fed’s estimated nominal neutral rate of 2.50%–2.75%. This policy stance aligns with the Fed’s continued commitment to controlling inflation.
However, the real focus is not the rate decision itself, but rather Chairman Powell’s press conference, where investors will seek clarity on how the Fed interprets the economic impact of recent tariff announcements. With diverse views within the Fed Board, markets are starved for forward guidance on inflation risks, growth expectations, and future policy calibration.
- Rate decision: Wednesday, May 7 at 2:00 p.m. ET
- Press conference: Wednesday, May 7 at 2:30 p.m. ET
Treasury Auctions May Matter More Than Fed Rates
Despite the significance of this FOMC meeting, our attention is also on the upcoming Treasury auctions, specifically the issuance of 10-year and 30-year bonds on Tuesday, May 6 and Thursday, May 8, respectively. The U.S. Treasury plans to auction $46 billion in 10-year notes and $25 billion in 30-year bonds.
These longer-dated securities are far more consequential for the real economy than the overnight fed funds rate. Interest rates on everything from mortgages to auto loans are benchmarked off Treasury yields, not the Fed’s target range.
The Tariff–Debt Connection: Foreign Appetite for Treasuries
The key risk lies in the interplay between trade policy and the Treasury market. If tariffs escalate or disrupt global trade flows, demand from foreign central banks and sovereign funds for U.S. Treasuries could decline. Currently, foreign holders account for roughly 25% to 30% of the Treasury and agency (Fannie Mae, Freddie Mac) debt markets.
The U.S. relies on recycling trade surpluses from partner countries - particularly China, Japan, and commodity-exporting nations – back into Treasury purchases. Any interruption to this flow, especially from a tariff-induced slowdown, could push long-term rates higher, regardless of what the Fed signals for short-term policy.
Bottom Line
While markets will closely watch the FOMC decision and Powell’s comments, we are more focused on how upcoming long-term Treasury auctions are received by investors. A weak auction could signal reduced foreign demand, pressuring yields higher and tightening financial conditions—just as the U.S. economy absorbs tariff shocks.
