Elevated uncertainty keeps FOMC on hold again

Summary

The FOMC voted unanimously today to keep its target range for the federal funds rate unchanged at 4.25%-4.50%.

In its post-meeting statement, the FOMC noted an easing in market volatility since its last meeting in May, stating "uncertainty about the economic outlook has diminished." That said, the Committee continued to characterize the level of uncertainty as "elevated."

The Summary of Economic Projections showed the FOMC sees a bit more stagflation than its last published forecasts in March. The median GDP forecast was downgraded in 2025 and 2026 while the median forecast for core PCE inflation and the unemployment rate edged up for both years.

The "dot plot" showed that the median FOMC member continued to look for 50 bps of easing by the end of 2025, while the median dot for year-end 2026 shifted up from 100 bps of easing in March to 75 bps in June.

The dispersion of the dots shows the Committee remains divided regarding the outlook for monetary policy. We currently look for the FOMC to commence an easing cycle in September and expect 75 bps of rate cuts by year-end. That said, the uncertain outlook regarding U.S. trade policy imparts an unusually high degree of uncertainty to the outlook for monetary policy.

Uncertainty Has Diminished But It Remains Elevated
The Federal Open Market Committee (FOMC) decided to maintain its target range for the federal funds rate at 4.25%-4.50% at the conclusion of its policy meeting today. The decision was unanimously supported by all 12 voting members of the Committee and was universally expected by market participants. After easing policy by 100 bps between last September and December, the FOMC has now kept rates on hold for four consecutive policy meetings (Figure 1).

In outlining its reasons for maintaining the federal funds rate in its current target range, the FOMC said in its post-meeting statement that "economic activity has continued to expand at a solid pace." The statement also noted that "the unemployment rate remains low" and that "labor market conditions remain solid." The statement continued to characterize inflation as "somewhat elevated." Indeed, the year-over-year rate of core PCE inflation, which most Fed officials believe is the best measure of the underlying rate of consumer price inflation, continues to run a bit above the FOMC's target of 2% (Figure 2). The Committee is more or less implying that it does not need to ease policy at this time because the economy generally remains resilient and inflation continues to exceed the Committee's target.

In the statement that was released after the last meeting on May 7, the FOMC noted that "uncertainty about the economic outlook has increased further" (emphasis ours). That meeting occurred soon after President Trump announced his "Liberation Day" tariffs, which led to volatility in financial markets. The president has subsequently reduced the "reciprocal" tariffs while negotiating trade agreements with some foreign countries. Consequently, volatility in financial markets has subsided somewhat. Reflecting this easing of tensions, the statement today noted that "uncertainty about the economic outlook has diminished." That said, the Committee continued to characterize the level of uncertainty as "elevated." The statement continued to stress that the FOMC "is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."

Dot Plot Shows that the FOMC Is Divided Regarding Outlook for Policy

The FOMC publishes its Summary of Economic Projections (SEP), which summarizes the macroeconomic forecasts of the 19 individual FOMC members, four times a year. The summary forecasts that were published today imply that the FOMC sees a bit more stagflation than it did in March. Specifically, the median GDP growth forecast was reduced by about 1/4 percentage point in both 2025 and 2026 while the median forecast for core PCE inflation was raised by about 1/4 percentage point in both years. The median forecast for the unemployment rate at the end of this year edged up from 4.4% in the March SEP to 4.5% in the June SEP. The rate for the end of 2026 rose by 0.2 percentage points relative to the March SEP, to 4.5%. The increase in the jobless rate in both years reflects the slower growth forecasts in June relative to March.

The "dot plot" that was released in March showed that the median FOMC member thought that 50 bps of rate cuts by the end of 2025 and a cumulative amount of 100 bps of policy easing by year-end 2026 would be appropriate. The dot plot that was published after the conclusion of today's meeting showed the median dot for year-end 2025 remaining unchanged, which continues to imply 50 bps of easing from the current target range of 4.25%-4.50% (Figure 3). That said, the Committee remains divided regarding the outlook for monetary policy this year. There are currently 10 members who believe that either 50 bps or 75 bps of rate cuts would be appropriate by the end of 2025. Two FOMC participants think that only 25 bps of policy easing this year would be appropriate. Seven members currently believe the Committee should remain on hold all year. There were only four participants in March who thought that the FOMC should refrain from cutting rates this year.

The median dot for year-end 2026 shifted up from 100 bps of cumulative easing in March to 75 bps in June. Again, however, the dispersed nature of dots for next year implies a meaningful number of different views among individual FOMC members regarding the outlook for monetary policy (Figure 3). Indeed, Chair Powell noted in his post-meeting press conference that "no one holds these rate paths with a great deal of conviction."

Outlook for Monetary Policy Remains Highly Uncertain

The dot plot and Powell's comment imply to us that the outlook for policy remains highly uncertain due, at least in part, to the uncertain outlook for U.S. trade policy. Higher tariffs will likely weigh on real GDP growth, which could be offset by policy easing, while also raising inflation, which would likely induce the FOMC to remain on hold if not tighten policy. As we discussed in our most recent U.S. Economic Outlook, we think the FOMC will look through any one-off price increases caused by tariffs and instead concentrate on the growth-eroding and unemployment-increasing effects of higher import duties. We currently look for the FOMC to commence an easing cycle in September, and look for 75 bps of rate cuts by the end of the year. That said, we readily acknowledge that the FOMC may refrain from cutting rates if inflation expectations rise and/or wages accelerate. Chair Powell also said in his press conference that policymakers "think they will learn a great deal on tariffs over the summer." We also will be focused intently on economic developments in coming months.