Rates Unchanged: What's Next for Investors?

By Ken Low, Head of Dealing, Moomoo Malaysia

Fed Holds Rates Steady Amid Stable Economic Indicators

On March 19, 2025, the Federal Open Market Committee (FOMC) announced that it would maintain the federal funds rate within the target range of 4.25% to 4.50%. This decision aligns with the Federal Reserve's dual mandate to promote maximum employment and stable inflation rates. The latest economic data reflects steady labor market conditions, with 151,000 jobs added in February and the unemployment rate holding at 4.1%. Inflation remains a key concern, with the Consumer Price Index (CPI) rising to 3.0% in January, up from 2.9% in December 2024, while the Personal Consumption Expenditures (PCE) Price Index—declined slightly to 2.5% from 2.6%. Despite some progress in curbing inflation, price levels remain above the Fed’s 2% target, warranting a cautious approach to monetary policy. Additionally, recent trade policies, including newly imposed tariffs, pose potential inflationary risks, further reinforcing the Fed’s decision to hold rates steady rather than risk premature adjustments.

Escalating Trade Tensions Take Center Stage

The period leading up to this meeting was marked by heightened attention to international trade policies. On March 4, President Donald Trump implemented significant tariffs, including a 25% levy on imports from Mexico and Canada, and an increased 10% tariff on Chinese goods, amounting to 20%. These measures aim to address trade imbalances and protect domestic industries.

In response, Canada and China have announced retaliatory tariffs targeting a range of U.S. products. Canada has imposed 25% tariffs on goods from sectors such as agriculture, manufacturing, and consumer goods. China has responded by imposing additional tariffs on U.S. agricultural products and implementing export controls on rare earth minerals essential for U.S. manufacturing. Mexico has also indicated plans to impose tariffs on certain U.S. goods, further escalating trade tensions.

Immediate Economic Indicators Reflect Market Uncertainty

The combination of steady interest rates and escalating trade tensions has introduced uncertainty into financial markets:

Market Reactions: Major indices have experienced significant declines in response to the new tariffs, reflecting investor concerns over potential economic slowdowns. Since the highs of 2025, the Dow Jones Industrial Average fell by 8.30%, while the S&P 500 dropped by 9.5% along with the Nasdaq also seeing declines. The Nasdaq Composite has just entered into a technical correction, closing down 13.0% from its December 16 record high.

Inflation Expectations: Economists warn that the tariffs could lead to higher costs for businesses that rely on international imports, which may pass these costs onto consumers, potentially elevating inflation. The tariffs are expected to raise inflation by 0.7% to 1.2% and decrease GDP growth by 0.6 percentage points. Hence, the FOMC chose to hold interest rates steady—while inflation shows a slight increase, slowing GDP growth suggests underlying economic vulnerabilities, and adjusting rates too soon could heighten the risk of a recession.

Investment Guidance: Key Sectors to Watch in a Changing Market

As global markets adjust to the Federal Reserve’s monetary policy and the newly imposed tariffs, investors—whether in the U.S. or Malaysia—should remain vigilant about key sectors that could be impacted in the coming months.

Manufacturing & Industrial: Supply Chain Pressures and Higher Input Costs

The 25% tariff on imports from Mexico and Canada, coupled with higher input costs from China, is raising operational costs for U.S. manufacturers in automotive, aerospace, and steel-related industries. Companies like Ford, Boeing, and Caterpillar, which rely on global supply chains, may face profit margin pressure and look to Southeast Asia for alternative production hubs. Malaysia’s manufacturing exports, particularly electrical components, semiconductors, and precision machinery, could see demand fluctuations depending on U.S.-China trade shifts. However, the Johor-Singapore Special Economic Zone (JSSEZ) is poised to attract high-tech manufacturing investments, while Batu Kawan and Kulim are strengthening their roles as semiconductor and industrial hubs. Additionally, the Sama Jaya Free Industrial Zone in Sarawak is emerging as a key destination for foreign high-tech firms, particularly in advanced electronics and chip manufacturing. U.S. investors should focus on manufacturers with strong domestic supply chains, while Malaysian investors should track foreign direct investment (FDI) flows into industrial parks, logistics, and semiconductor-related industries.

Agriculture & Commodities: Tariffs Create Instability in Export Markets

China and Mexico's retaliatory tariffs on U.S. soybeans, corn, beef, and pork are expected to reduce farm revenues. The USDA projects U.S. agricultural exports to reach $170.5 billion in fiscal year 2025, a slight increase from previous estimates; however, imports are forecasted at $219.5 billion, resulting in a $49 billion agricultural trade deficit. Major agribusiness companies like Tyson Foods and Archer Daniels Midland may experience weaker earnings if these trade restrictions persist. In Malaysia, palm oil prices are experiencing fluctuations. As of March 10, 2025, Malaysia's palm oil stocks fell to a nearly two-year low due to decreased production, with stocks dropping 4.31% from the previous month to 1.51 million metric tons. Additionally, rising fertilizer and animal feed costs, stemming from disrupted global trade, may affect Malaysian agribusiness profitability. U.S. investors should monitor agriculture stocks with diversified export markets, while Malaysian investors should focus on plantation stocks that could benefit from these trade shifts.

Retail & Consumer Goods: Price Increases Could Shift Spending Patterns

The 25% tariffs on imports from Canada and Mexico and 20% tariff on Chinese goods are expected to raise costs for U.S. retailers, particularly in sectors like electronics, apparel, and household goods. Target Corp. has warned consumers to anticipate price hikes, especially in fruits and vegetables, a significant portion of which are imported from Mexico during winter months. Similarly, Best Buy Co. has indicated that price increases are "highly likely" for gadgets and appliances, given that China and Mexico are their primary sourcing countries. These developments could squeeze profit margins for mass-market retailers like Walmart and Target, as price-sensitive consumers adjust their spending habits. In contrast, luxury retailers such as LVMH and Hermès may be less affected due to their affluent customer base's higher price tolerance.

Recent data indicates that the SPDR S&P Retail ETF (XRT) has experienced notable declines, reflecting challenges in the retail sector. For instance, the XRT fell 1.56% to $69.39 amid weak consumer spending and disappointing earnings reports from major retailers like Kohl's, which reported a 9.4% drop in Q4 sales and issued weak guidance for 2025. Similarly, the Dow Jones Industrial Average has faced downward pressure, dropping 2.1% (approximately 900 points) amid concerns over tariffs and economic outlook, which could impact consumer goods companies within the index.

In Malaysia, the impact of a weaker ringgit is creating both winners and losers in the retail sector. Local consumer brands such as Nestlé Malaysia, Padini, and MR DIY are expected to benefit as consumers shift towards more affordable domestic products in response to rising import costs. On the other hand, luxury import-heavy stocks like Bermaz Auto, Cycle & Carriage, and Apple resellers such as Switch Malaysia may face headwinds, as higher import prices could dampen demand for premium goods.

U.S. investors should focus on retailers with strong supply chain adaptability, while Malaysian investors should monitor currency-sensitive sectors, especially automotive and premium electronics.

Technology & Semiconductors: Supply Chain Shifts Could Benefit Malaysia

With the U.S. imposing new restrictions on semiconductor exports and China limiting rare earth mineral supplies, tech companies are reshuffling production locations to minimize risks. Malaysia, a key global semiconductor hub, is already seeing expansion from Intel, Infineon, and Texas Instruments in Penang and Kulim, as companies look for China alternatives. This shift could boost Malaysia’s tech sector revenue and drive higher valuations for local semiconductor stocks. U.S. investors should track chipmakers relocating to Southeast Asia, while Malaysian investors should consider Bursa-listed semiconductor and precision engineering stocks.

Macroeconomic Factors Influencing Investment Strategies

Currency Exchange Rates: Impact on Imports and Exports

A weaker ringgit benefits exporters in electronics and manufacturing, but raises costs for sectors like aviation, automotive, and retail due to pricier imports. Investors should watch FX-sensitive industries closely as policy decisions unfold.

Global Trade Diversion & Supply Chain Shifts: Who Gains?

With companies seeking to avoid tariffs, Southeast Asia is emerging as a key alternative supply chain hub. Malaysia may stand to benefit from potential increase in investments, but uncertainty in global demand may slow expansion in export-driven sectors. Investors should track FDI inflows and logistics sector growth, which could be a leading indicator of new trade opportunities.

Key Takeaways for Investors

Sector-Specific Monitoring: Investors should closely track companies with high exposure to tariffs and global trade flows.

Anticipate Market Volatility: Expect short- to mid-term instability, particularly in FX-sensitive and import-heavy sectors.Watch for Supply Chain Shifts: Southeast Asia’s logistics, industrial parks, and tech infrastructure will see rising foreign investments.Interest Rate Sensitivity: Future monetary policy changes in Malaysia and the U.S. will drive currency strength, capital flows, and borrowing costs.

Conclusion: Navigating Uncertainty with Informed Strategies

The Federal Reserve's decision to maintain interest rates reflects confidence in current economic conditions. However, escalating trade tensions introduce new variables that could impact both domestic and global markets. Investors are advised to stay informed, assess their portfolios for exposure to affected sectors, and consider diversification to mitigate potential risks. Monitoring developments in trade policies and central bank decisions will be crucial in making well-informed investment choices in the months ahead.

Disclaimer: This commentary is for informational purposes only and does not constitute financial advice. Investors should conduct their own research or consult financial advisors before making investment decisions. Full disclaimers at https://www.moomoo.com/my/support/topic9_37. This commentary has not been reviewed by the SC.