A Cautious Fed Holds Tight Amid Uncertainty

Key Takeaways

• As expected, the Federal Reserve’s Federal Open Market Committee (FOMC) this week kept the federal funds target rate range at 4.25% to 4.50%, amid heightened uncertainty from Middle East tensions, volatile oil prices, trade wars, and a recent U.S. debt downgrade by Moody’s.
• The Fed’s expected number of rate cuts for 2025remained at two, but the committee reduced the number of anticipated cuts in 2026 from two to one with an additional cut in 2027. These revisions would have the fed funds rate finishing 2027 at a range of 3.25% to 3.50%, 25 basis points higher than previously predicted.
• Projections for inflation and unemployment increased, while GDP growth estimates decreased.
• The latest FOMC statement had one meaningful change from May, acknowledging increasing economic uncertainty.

At its June meeting, the Federal Open Market Committee (FOMC) unanimously agreed to hold the fed funds rate range at 4.25%to 4.50% amid heightened uncertainty from Middle East tensions, volatile oil prices, tariff disputes, and a recent U.S. debt downgrade by Moody’s, all of which complicated the economic outlook and policy decisions. This hold stance has continued to be priced in by the market, as chances for no interest-rate cuts in June started the week at 99.8%. While investors keep waiting the first rate cut of the year, fixed income has continued to hold onto positive returns year-to-date, while equities have bounced back into positive territory as relief on imposed tariffs have lifted some of the uncertainty plaguing the U.S. economy and caused many investors to jump back into the market even given the higher-for-longer interest rate environment.

Incoming data since the FOMC’s May meeting suggests growth in overall economic activity has moderated. While real GDP declined 0.2% quarter-over-quarter in the first quarter—with imports weighing on growth as households and businesses sought to front-load anticipated tariff increases—private domestic demand appears to be growing at a slower pace. Equipment investment jumped in the first quarter, but private consumption showed signs of deceleration, growing just 1.2% quarter-over-quarter. Real household spending decreased further in April, edging up 0.1% month-over-month, and consumers appear to have dramatically slowed purchases of cars in May, after having front-run anticipated price increases in prior months. Looking ahead, surveys of households and businesses are revealing a weak sentiment amid elevated tariffs and trade policy uncertainty, even as preliminary readings of the University of Michigan’s Consumer Sentiment Index this month indicate some improvement. Meanwhile, labor market conditions are showing a gradual deceleration given May numbers, and there are early signs payroll employment estimates since April 2024 may be revised down with the next revision released in February 2026. Meanwhile, the unemployment rate has remained at 4.2%.

“The U.S. economy has defied all kinds of forecasts for it to weaken, really over the last three years, and it’s been remarkable to see … again and again when people think it’s going to weaken out,” said Chair Jerome Powell at the post-meeting press conference. “Eventually it will, but we don’t see signs of that now.”

In the June Summary of Economic Projections (SEP), FOMC participants revised slightly upward the unemployment and inflation rates, while lowering their GDP growth forecast. The unemployment rate increased 10 basis points to 4.5%, and the FOMC expects it to remain at this level through 2026. On the inflation front, core CPI inflation was revised higher to 3.1% from 2.8%, well above the Fed’s 2%target and March’s 2.7% projection for 2025. As for GDP growth, the median projection in the latest SEP decreased from 1.7% to 1.4% for 2025 and 1.8% to 1.6% for 2026.

The Fed’s most recent statement showed only a few edits from May with changes mostly focused unemployment and uncertainty.

After the Fed announcement, the 10-year Treasury ended the day lower and finished at 4.38%; short and long rates were unchanged. The Dow Jones Industrial Average and S&P 500 Index returned -0.10% and -0.03%, respectively, for the day.

10-Year Treasury Yield over the Past 12 Months

In Conclusion

The fourth FOMC meeting of the year largely kept the status quo with tepid revisions to the committee’s SEPs. Rates remained unchanged, as the expected number of interest-rate cuts for 2025 continued to be two. However, the Fed reduced expected rate cuts in 2026 from two to one with another rate cut in 2027. This latest projection leaves the fed funds rate finishing 2027 at a range of 3.25%-3.50%, 25 basis points higher than prior expectations.

Chair Powell did reiterate impacts of tariffs could be a headwind on GDP growth and inflation, but that hasn’t shown up in the data yet. That said, the FOMC said it was well positioned and should headwinds impact progress toward its long-term goals, the committee is ready to act. However, they will remain patient due to uncertainty being elevated.

While some of the near-term economic noise has subsided and reduced volatility across both equity and fixed-income markets, it is hard to tell whether the policy decisions taken by the Trump administration have actually worked their way into the economy or could come into play further down the line. From the Fed’s current perspective, most of the issues plaguing investors still appear to be acute and transitory, and the central bank will continue to wait to cut rates until its targets are better insight or the economy’s acute issues become systemic and the data warrants action.  

Definitions

One basis point is equal to 0.01%.

The 10-year Treasury bond yield is the interest rate the U.S. government pays to borrow money for a decade, serving as a benchmark for other interest rates and a key indicator of investor sentiment about economic conditions.

The Consumer Price Index (CPI) measures the overall change in consumer prices based on a representative basket of goods and services over time. Core CPI is the change in prices of goods and services, except for those from the food and energy sectors.

Consumer sentiment is a statistical measurement of the overall health of the economy as determined by consumer opinion.

The Core Personal Consumption Expenditure (PCE) Price Index provides a measure of the prices paid by people for domestic purchases of goods and services, excluding the prices of food and energy. The core PCE is the Fed's preferred inflation measure.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The federal funds rate is the target interest rate set by the Fed at which commercial banks borrow and lend their extra reserves to one another overnight.

Fixed income refers to assets and securities that pay a set level of income to investors, typically in the form of fixed interest or dividends.

Gross Domestic Product (GDP)is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Real GDP is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year.

Moody's and Fitch is a private independent rating service where it evaluates a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from `AAA', which is the highest grade, to `D', which is the lowest grade.

The S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

Spread is the measurement of the spread of a fixed-income security rate and the risk-free rate of return, represented by treasury bonds. Spread income refers to the additional income from this difference.

The Summary of Economic Projections (SEP), known informally as the “dot plot,” is a collection of forecasts for the economy, inflation, the labor market, and interest rates offered by the seven Fed governors and 12 regional Fed presidents.

U.S. Treasury notes are debt securities issued by the U.S. and are loans made by the investor to the government with varying lengths of maturity.

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