FOMC policy and outlook - June 2025

At its 18-19 June meeting, the Federal Open Market Committee (FOMC) left interest rates unchanged, as widely expected. While the decision itself was uneventful, the accompanying projections and commentary provided insight into how the Fed views the balance between slowing inflation and increasing risks to growth. The overall tone was one of caution, reflecting both persistent economic uncertainty and a desire to keep policy options open.

Policy decision and economic assessment

As expected, the FOMC decided to maintain the target range for the federal funds rate at 4.25%–4.5%.

Chair Powell stated that the economy remains in a solid position despite unusually high uncertainty. Economic activity has continued to expand, and the labour market remains strong, with the unemployment rate at 4.2% and employment close to maximum levels.

While GDP edged down in the first quarter, mainly due to swings in net exports, underlying domestic demand grew at a healthy pace. However, recent surveys of households and businesses showed weakening sentiment and rising uncertainty, largely driven by trade policy concerns.

Inflation has declined significantly but remains above the Fed’s 2% target. Powell cited estimates placing personal consumption expenditures (PCE) inflation at 2.3% and core PCE inflation at 2.6% in May. Short-term inflation expectations rose in the spring, attributed largely to concerns over tariffs, but longer-term expectations remain broadly aligned with the Fed’s inflation objective.

Powell emphasised that the economic outlook is clouded by uncertainty around trade, immigration, fiscal, and regulatory policies. Although expectations for the final level of tariffs have moderated since peaking in April, tariffs are still expected to raise prices and slow growth. While the inflationary effects may prove temporary, there is a risk that they become more persistent. The Fed’s priority is to prevent that outcome by ensuring that long-term inflation expectations remain well anchored.

FOMC projections and market reaction

Much of the focus at the meeting centred on how the FOMC expects the economy to evolve. Given the Fed’s mandate, particular attention was paid to the outlook for unemployment and PCE inflation. The projections suggest that the FOMC expects the economy to experience a contractionary supply shock.

The median unemployment rate forecast was revised up by 0.1 percentage points for 2025, 0.2 points for 2026, and 0.1 points for 2027. GDP growth was revised down by 0.3 points in 2025 and 0.2 points in 2026. Similarly, the projected paths for both headline and core PCE inflation were raised by 0.3 points in 2025, 0.2 in 2026, and 0.1 in 2027.

The median projection for the federal funds rate in 2025 was unchanged, but it was revised up by 0.2 percentage points in 2026 and 0.3 in 2027. A closer look at the dot plot shows that the number of FOMC participants expecting no change in rates this year increased from four in March to seven in June. Two members foresee a 25-basis-point cut by year-end, while eight anticipate a 50-basis-point cut. Overall, only a modest shift in views could lead the median projection to point to no change in 2025.

Interestingly, CME data indicate that market participants are largely disregarding the possibility that the FOMC will hold rates steady through 2025, pricing in only a 6% probability to that outcome. Between 13 and 20 June, the probabilities implied in futures prices for zero, one or two cuts rose slightly, while those for three or four cuts declined.

One way to reconcile the difference between the FOMC’s projections and market pricing is that the Fed sees much greater short-term uncertainty. While both the Fed and the market expect rates to fall over the next two to three years, FOMC members may be more concerned that unpredictable policy developments in the near term could require keeping interest rates higher for longer to prevent inflation pressures from re-emerging.

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