USD/JPY drops as dovish Fed projections weigh on yields and focus shifts to Powell

• Fed holds rates steady, signals two cuts this year.
• The 2-year yield slipped nearly 5 basis points to 3.9%, pulling USD/JPY lower by 0.45% on the day toward 144.50.
• Traders look to Fed Chair Jerome Powell for clarity on the rate path amid uncertainty over inflation, fiscal policy, and tariffs.

The Japanese Yen (JPY) has extended its advance against the US Dollar (USD) following the Federal Reserve's policy decision, as traders shift focus to remarks from Fed Chair Jerome Powell.

USD/JPY dropped sharply after the announcement and is now trading around 144.50, down 0.45% on the day, as bond yields declined and rate-cut expectations firmed.

As expected, the Fed left interest rates unchanged at 4.25%-4.50%, with a unanimous decision. Policymakers cited persistent uncertainty surrounding fiscal policy, tariffs, and tax measures, making it difficult to offer clear forward guidance.

Markets interpreted the update as dovish. Treasury yields fell, with the 2-year note dropping nearly 5 basis points to 3.9%. The updated dot plot now signals two rate cuts by the end of 2025, compared to one in the March forecast. Seven FOMC members expect two cuts, while four anticipate just one.

Some analysts questioned whether the data justifies this shift. However, markets reacted positively to the more accommodative tone embedded in the projections.

The Fed removed previous language that warned of rising risks from inflation and unemployment. Although uncertainty remains, the labor market is now described as "solid," with unemployment projected to edge up to 4.5% by year-end.

Core PCE inflation is now forecast at 3.1%, up from 2.8% in March, while headline inflation is projected to reach 3.0%. Economic growth is expected to slow to 1.4% this year, down from the previously projected 1.7%.

All eyes now turn to Fed Chair Powell's press conference for clarity on the policy outlook. His tone and guidance will be key in determining whether markets maintain expectations for near-term easing or adjust course.