The U.S. Federal Reserve kept interest rates unchanged at 4.25%–4.50% in May 2025. Chair Jerome Powell emphasized the growing uncertainty in the economic outlook, largely due to the evolving impact of trade tariffs and increasing two-sided risks to the Fed’s dual mandate: price stability and full employment. While inflation remains relatively subdued compared to previous periods, early signs of labor market softness are beginning to surface. Powell signaled a cautious stance, stating, “there’s no real cost to waiting,” reflecting the Fed’s desire to avoid premature moves in either direction.

One critical challenge the Fed now faces is navigating an environment where supply-side disruptions driven by geopolitical tensions and the threat of U.S. trade tariffs cannot be addressed effectively through monetary policy alone. Powell acknowledged that while interest rates can help manage demand, they’re not well-suited to offset tariff-driven supply shocks. As such, the Fed appears comfortable staying on hold, waiting for clearer signals from incoming data and the evolving global trade environment.

How did markets digest this news?

Uncertainty continues to dominate investor sentiment. The U.S. yield curve has shifted downwards, caused by yields on longer-term U.S. Treasuries declining driven by rising expectations of future rate cuts. The front end of the curve (i.e. the shorter-term U.S. Treasuries) is now pricing in as many as three cuts in 2025 and additional easing into 2026 to stimulate economic growth with the assumption the U.S. economy loses its resilience.

Meanwhile, foreign demand for U.S. Treasuries appears to be softening. Investors, particularly from Asia, are beginning to diversify away from dollar assets toward safe-haven alternatives like gold, European bonds, and Japanese Yen. The pause in Trump’s proposed tariffs has provided temporary relief, but global investors remain cautious, awaiting concrete trade developments, particularly around U.S.–China negotiations. This fragile sentiment will likely limit upsides in developed markets and add to near-term volatility.

Trade Updates - Early signs of relief emerging

Global trade tensions may be easing slightly as the U.K. and U.S. strike a preliminary deal. While the 10% base duty stays, auto export tariffs will drop from 27.5% to 10%, and U.K.-made steel will be exempted from any duties. This has offered a modest boost to investor sentiment, as markets look for signs of de-escalation.

All eyes now turn to upcoming U.S.–China negotiations. Trump has hinted at lowering the 145% tariff, signaling a potential shift toward more constructive trade talks. While uncertainty remains, these developments are an encouraging start.

Simpan Views

Fed’s “Wait-and-See” Stance

The Fed’s “wait-and-see” stance leaves room for a wide range of outcomes. Much will depend on how the labor market evolves and whether tariff threats materialize into actual trade restrictions. If inflation proves sticky or geopolitical tensions escalate, the Fed may be forced to maintain higher rates for longer, potentially dampening growth and market returns.

In contrast, should data soften and trade concerns ease, a more supportive rate environment could emerge. Either way, markets are bracing for volatility and directional clarity may take time to emerge.

Indonesia continues to look compelling

While developed markets wrestle with macro and policy uncertainty, Indonesia offers a more grounded investment case. The Jakarta Composite Index (JCI) rebounded 3.9% in April, driven by blue-chip and large-cap stocks, with buying activity largely dominated by domestic investors.

Bank Indonesia (BI) has maintained a stable policy stance, even as inflation remains comfortably within target at 1.95%. The recent IDR appreciation to 16,500 from 16,800, and weaker-than-expected 1Q GDP print may also open doors for BI to adopt a more accommodative stance ahead  (i.e. continue to cut interest rates), adding further support to asset prices.

We believe the Indonesian equity market is well-positioned in the current environment. Our strategy remains focused on companies with strong domestic fundamentals, attractively valued blue-chip names, and momentum-driven stocks benefiting from local fund flows. These positions not only offer resilience in the near term but also potential upside as foreign investors eventually re-engage with EM assets.

The Call for you? Continue Investing

With the Fed staying sidelined and global markets searching for direction, we see a compelling case to increase exposure to Indonesian equities. The macro backdrop is stable, valuations remain reasonable, and domestic investors are driving a constructive market tone. Our Sustainable Equity Fund outperformed by 5.59% against the benchmark in April 2025 and we believe there is still room for further upside. The fund is well-suited for long-term growth, aligning with sustainable investment principles while building wealth over time.