Fed Keeps Rates Steady, Says Risks Still Elevated
As widely expected, the Federal Reserve's Federal Open Market Committee (FOMC) decided to hold its policy rate steady at its June meeting. The target range for the federal funds rate—the rate banks charge each other for overnight loans—remains at 4.25% to 4.5%. The quarterly Summary of Economic Projections still indicates a median estimate of two rate cuts this year, but with inflation expected to remain elevated, that projection may be reduced to one or even none over the course of the next few meetings.
The statement accompanying the policy announcement emphasized that uncertainty about the economic outlook has diminished, but the risks of higher inflation and potentially higher unemployment are "still elevated." The Fed, along with markets, continues to wait for clarity on trade policy and the federal budget, and is assessing the impact of immigration limits on the labor market.
The Fed's economic projections have an air of stagflation—stagnant economic growth with inflation—given gross domestic product (GDP) growth was revised lower for the next two years while inflation estimates were revised up. Real (or inflation-adjusted) GDP for 2025 was reduced to 1.4% compared to 1.7% in March, and for 2026 it was lowered to 1.6% from 1.8%. The unemployment rate projection was revised up by a modest one-tenth of a percent to 4.5% for this year and 4.4% next year.
Economic projections
Source: Federal Reserve Board, 6/18/2025.
Notes: For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. The central tendency excludes the three highest and three lowest projections for each variable in each year. The range for a variable in a given year includes all participants' projections, from lowest to highest, for that variable in that year. Longer Run projections for Core PCE are not collected.
However, inflation projections were revised up significantly for next year. The personal consumption expenditures (PCE) index and "core" PCE (excluding food and energy prices) are now estimated to come in at 3.0% in 2025 from 2.7% amid the risks coming from trade policy and expansive fiscal policy. As long as the Fed sees inflation heading higher, it will be difficult to see much in the way of rate cuts in the near term.
Inflation is projected to be above the Fed's 2% target
Source: Bloomberg.
Monthly data from 1/31/2017 to 4/30/2025, which is the most recent data available.
PCE: Personal Consumption Expenditures Price Index (PCE DEFY Index), Core PCE: Personal Consumption Expenditures: All Items Less Food & Energy (PCE CYOY Index), percent change, year over year. Dotted lines represent year-end 2025, 2026 and 2027 FOMC projections, as of 6/18/2025.
Based on the "dot plot," seven members of the committee see no change in policy for this year and two expect only one cut. Consequently, we would not be surprised if the Fed kept policy on hold even longer than the market has been anticipating. The number of dots—each representing a Fed official's projection for the federal funds rate—above the median is greater than the number below.
Fed members are still projecting two rate cuts this year
Source: Bloomberg, as of 6/18/2025.
Median dot represents the median forecast from the 6/18/2025 FOMC meeting. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
Uncertainty means less easing and a steeper yield curve
The markets and central banks are grappling with a complicated mix of policies. Tariffs can raise inflation and slow growth. The budget proposals making their way through Congress could boost the prospects for some consumers but diminish them for others. Immigration limits may shrink the size of the labor force, pushing up wages while causing small and medium-sized businesses to falter. Layer in wars in Europe and the Middle East, and the potential for higher energy prices along with the outlook for the economy suggest a potential growth slowdown and higher inflation.
For the bond market, those risks suggest a steeper yield curve, with long-term yields staying elevated relative to short-term yields. The risk premium for holding longer-term bonds is likely to remain high or rise, while short-term rates are anchored by expectations for Fed rate cuts.
In the press conference that followed the meeting, Fed Chair Jerome Powell commented that the level of uncertainty is high, from a "trade standpoint, from an immigration standpoint. You see this not just here [meaning the U.S.] but everywhere." As these changes play out, we anticipate volatility in the bond market will remain elevated.
For investors, volatility can mean opportunity. We favor an intermediate-term average duration for portfolios and focusing on high credit quality bonds.
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