At the policy meeting held on June 17–18, the Federal Reserve, as widely expected, decided to maintain the current interest rate level. In the quarterly update of U.S. interest rate and economic forecasts, Fed officials still projected two rate cuts this year. However, they raised their forecasts for inflation and unemployment and lowered expectations for economic growth. Fed Chair Jerome Powell stated that the uncertainty facing the U.S. economy has decreased since peaking in April, though it remains elevated.
Powell reiterated that the Federal Reserve would continue to remain in a wait-and-see mode, making monetary policy adjustments only after gaining greater clarity on economic developments.
According to the latest projections from Fed officials, the median forecast among the 19 policymakers still indicates two rate cuts this year, consistent with the March forecast. However, the number of officials anticipating no rate cuts this year rose to seven, up from four in March.
The Fed also revised down its projected number of rate cuts for both 2026 and 2027 by one. Over the remainder of the current easing cycle, the total expected rate reduction has been scaled back to one full percentage point.
Compared to March—before the Trump administration announced its sweeping global reciprocal tariff plan—the Fed now sees mounting stagflationary pressures in the U.S.
Fed officials expect U.S. inflation to reach 3.0% by the end of 2025, with core inflation hitting 3.1%, both 0.3 percentage points higher than previous forecasts.
The expected U.S. GDP growth rate for 2024 has been lowered from 1.7% to 1.4%, and the projected unemployment rate for the end of 2025 has risen from 4.4% to 4.5%. The current unemployment rate stands at 4.2%.
Alaric noted that individual Fed officials’ rate and economic projections should be viewed with caution. At last June’s policy meeting, officials lowered their expected rate cuts for 2024 from 75 basis points to 25 basis points, yet the Fed ultimately cut rates by 100 basis points in total that year.
Following the Trump administration’s rollout of an unexpectedly aggressive global tariff policy in early April, many economists anticipated a spike in prices. Yet, so far, U.S. inflation and other economic indicators have remained surprisingly moderate.
On June 12, Goldman Sachs lowered its estimate for the probability of a U.S. recession in the next 12 months from 35% to 30%, citing looser financial conditions and a more moderate trade policy stance, which could mitigate the impact of tariffs on prices and growth.
In May, the U.S. Consumer Price Index (CPI) rose 2.4% year-on-year, slightly above the prior 2.3% and in line with expectations. On a monthly basis, the CPI rose by 0.1%, below both the prior 0.2% and forecast of 0.2%. Core CPI, excluding food and energy, rose 2.8% year-on-year and 0.1% month-on-month, both below expectations of 2.9% and 0.3%, respectively.
What surprised many economists was that several categories expected to see price increases due to tariffs actually saw declines. Energy prices fell by 1% month-on-month; new and used car prices dropped by 0.3% and 0.5%, respectively. The main drivers of inflation in May were food and housing, both up 0.3% month-on-month. Egg prices fell 2.7% from April but surged 41.5% year-on-year. U.S. housing prices rose 3.9% year-on-year in May, marking the slowest pace since the end of 2021.
In the labor market, U.S. nonfarm payrolls increased by 139,000 in May, beating expectations of 126,000, with the unemployment rate steady at 4.2%. April’s nonfarm job gain was revised down from 177,000 to 147,000. The market remains attentive to signs of potential labor market softening. Over the past five months, average monthly job growth has been just 124,000, down from 180,000 during the same period last year.
In its post-meeting statement, the Fed said that although uncertainty about the U.S. economic outlook has decreased, it remains elevated. The Fed will continue to assess the risks to its dual mandate of price stability and maximum employment.
Fed Governor Adriana Kugler recently stated that most policymakers are “first and foremost concerned about inflation, with concerns about a potential slowdown in the U.S. economy coming second.”
Given that this meeting took place against the backdrop of renewed Middle East tensions, some market participants were surprised by the Fed’s assessment that uncertainty had declined.
Heightened tensions between Israel and Iran raised fears of a global energy price surge. Around one-fifth of global oil trade flows through the Strait of Hormuz, and there were calls within Iran to blockade the key waterway. However, by the end of the June 18 policy meeting, signs of de-escalation in the region had emerged.
At the press conference that day, Powell responded to questions about the potential impact of Middle East tensions on U.S. inflation, saying that the Fed was closely monitoring the developments like everyone else. He noted that energy prices might rise temporarily but would likely fall back. “These types of events generally do not have a lasting impact on inflation,” he said.
Powell added that unlike during the oil crisis of the 1970s, the U.S. economy is now far less dependent on imported oil.
Nonetheless, many market analysts warned that if Trump’s tariff war does impact the U.S. economy, it may begin to show in hard data—such as inflation, employment, and growth—in the coming months.
The 90-day suspension period for the global reciprocal tariff scheme will expire on July 9. Furthermore, Trump did not reach any new trade agreements with America’s major partners at the G7 summit in Canada this week, raising the likelihood that reciprocal tariffs will increase after July 9.
Some analysts believe that the absence of a CPI rebound in May may be partially due to U.S. importers front-loading inventory in the first quarter to avoid higher tariffs, delaying any upward pressure on prices.
Sluggish consumer demand is another, more worrying explanation. For instance, U.S. new car sales declined by nearly 10% from April to May. The May CPI report also showed lower prices for non-essential goods and services such as automobiles, clothing, airfares, and hotels, possibly reflecting companies cutting margins to meet sales targets. If tax cuts replace tariffs as the dominant economic narrative, consumer sentiment in the U.S. may improve.
On June 18, Trump renewed his call for Powell to cut interest rates, calling the decision not to do so “stupid.” He asserted that U.S. interest rates should be lowered by at least two percentage points.
According to CME’s FedWatch Tool, market expectations for a Fed rate cut in September remained steady at around 60% before and after this meeting.
As Middle East tensions eased, U.S. equity markets reacted calmly to the Fed’s message. The Dow Jones Industrial Average closed down 0.10%, the S&P 500 slipped 0.03%, and the Nasdaq rose 0.13%.
On June 17, following Trump’s demand for Iran’s unconditional surrender, oil prices surged more than 4%. On June 18, Trump softened his tone, stating that Iran was interested in nuclear negotiations with the U.S., bringing some stability to the energy market. That day, U.S. WTI crude futures rose 30 cents, or 0.4%, to settle at $75.14 per barrel, while Brent crude gained 25 cents, or 0.25%, to close at $76.70 per barrel.