On June 17th, the Federal Reserve held its last interest rate meeting of the first half of the year in Washington D.C. It is widely expected that the Fed will continue to keep the benchmark interest rate within the range of 4.25%-4.50%, as policymakers weigh recent weak inflation data against ongoing uncertainties brought about by US President Trump’s trade policies. Although the short-term outlook for monetary policy remains stable, the quarterly updated economic outlook (SEP) and the interest rate dot plot may provide more clues about future policy moves. The press conference with Federal Reserve Chair Jerome Powell is also expected to attract significant attention.
Changes in the Economic Outlook
The Federal Open Market Committee (FOMC) unanimously decided last month to keep the federal funds rate unchanged. Recent indicators suggest that economic activities continue to expand at a steady pace, with the labor market remaining solid. However, some changes have occurred in the economic data over the past five weeks.
Economic Activity: Despite rising policy uncertainties, hard data shows that economic activities have remained stable. Consumer spending was strong in the second quarter, and employment continued to grow at a healthy pace in May. The unemployment rate has remained stable at 4.2% since March, in line with the Fed’s estimate of overall full employment.
Inflation: Inflation has not shown the impact of tariffs yet. In May, the US consumer price index (CPI) rose slightly year-on-year to 2.4%, and the core CPI remained at 2.8% for the third consecutive month. Fitch Ratings’ chief economist, Brian Coulton, noted that inventories accumulated before the tariff increase may delay the transmission of the tariff effect, and the uncertainty of US trade policy may affect the speed at which enterprises adjust prices.
Risks and Uncertainties
Changes in trade policies may pose upside risks to unemployment and inflation, as reflected in the Fed’s Beige Book on economic conditions. The update will re-examine the FOMC’s views on the economy and the federal funds rate. If the median forecast for the federal funds rate at the end of the year remains unchanged at 3.875%, it indicates that the Fed still expects two rate cuts within the year.
Inflation Forecast: Given the changes in tariff rates since March, institutions generally expect the Fed to raise its inflation forecast for the end of 2025 in the updated SEP.
GDP Growth Forecast: Against the backdrop of a decline in the first quarter and continuous challenges to growth in the second half of the year, the growth forecast for the US GDP may be revised downward to 1%-1.5%. However, the median unemployment rate is likely to remain unchanged at 4.4%, as the slowdown in labor supply growth and reluctance of enterprises to lay off workers have prevented the unemployment rate from rising significantly this year.
Uncertainty Surrounding the Dot Plot
There is a degree of uncertainty regarding the trend of the dot plot. Apart from Federal Reserve Governor Christopher Waller and Chicago Fed President Austan Goolsbee, the Fed generally holds a cautious attitude towards rate cuts. For instance, Atlanta Fed President Raphael Bostic has explicitly stated that he expects only one rate cut this year. Wells Fargo noted in a research report that the Fed’s speeches do not indicate that the FOMC is in a hurry to cut interest rates at the next few meetings. If two officials who supported the two rate cuts “switch sides,” the median expectation of easing will fall from 50 basis points to 25 basis points.
Clarity on Rate Cut Prospects
Since the last interest rate meeting, President Trump has frequently pressured the Fed to cut interest rates, comparing it with other central banks like the European Central Bank. In late May, Trump had his first conversation with Fed Chair Powell during his term, but Powell did not “give in” on monetary policy.
After the release of the latest non-farm payroll data, Trump once again called on the Fed to cut interest rates by 100 basis points, describing the Fed’s monetary policy as a “disaster.” If the Fed eases its monetary policy, it will significantly lower the long-term and short-term interest rates of debts that are about to mature. There is almost no inflation now, and even if inflation does return, the Fed can raise interest rates again.
Boris Schlossberg, a macro strategist at BK Asset Management, told Yicai Global in an interview that recent comments from Fed officials seemed to indicate that the committee was satisfied with the current monetary policy stance. Given the current data indicating that economic activity remains resilient, it is expected that the post-meeting statement and Powell’s press conference will convey the message that the committee is still in no hurry to adjust policies.
One of the key points of contention between Wall Street and the Fed is whether the inflation caused by tariffs is one-off or temporary. Claudia Sahm, the proponent of the “Sahm Rule” and chief economist of New Century Advisors, is cautious. She believes that most people within the Fed will not abandon their vigilance against inflation as quickly as Waller did. Given the ambiguous outlook and the risk of mistakes, the Fed will not take action until there is evidence that inflation is temporary, which may still take several months.
Market Expectations and Future Outlook
The pricing of federal funds rate futures indicates that the market expects the Fed to cut interest rates in September or October, with a possibility of two rate cuts within the year. Danske Bank expects that Powell’s stance will be largely in line with that of his colleagues, and he will cautiously avoid strong forward guidance. The bank expects that the Fed will cut interest rates twice in 2025 and then three more times in 2026, with overall risks tending to be moderate.
Wells Fargo believes that given that most of the tariff hikes occurred between March and May, the overall impact of these policy changes on pricing remains worth observing. The FOMC needs to see a more obvious weakness in the labor market before it can start to lower the federal funds rate again. The bank expects such weakness in the coming months and a 75 basis point interest rate cut by the end of the year.
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