“Uncertainties” rule. Wait-and-see amid inflation fears and slowing growth.
By Wolf Richter for WOLF STREET.
The FOMC voted unanimously today to keep the Fed’s five policy rates unchanged, for the fourth meeting in a row, after cutting by 100 basis points in 2024.
- Target range for the federal funds rate: 4.25-4.50%.
- Interest it pays the banks on reserves: 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs): 4.25%
- Interest it charges on overnight Repos at its Standing Repo Facility: 4.50%.
- Interest it charges banks to borrow at the “Discount Window” at 4.50%.
The “dot plot” shifts more hawkish.
Via the “dot plot,” the FOMC communicated that participants see only two rate cuts in 2025, same as at the March meeting, with a slightly further hawkish shift: 7 of the 19 participants see no cut at all in 2025, up from 4 in March, and another 2 participants see only one cut, down from 4.
In other words, 9 of the 19 members see no or one cut, one more than in March. The median projection is now only one participant away from seeing just one cut in 2025.
Today’s meeting was one of the four per year when the FOMC releases its “Summary of Economic Projections” (SEP), which includes the “dot plot.” The prior SEP came out at the March meeting. The SEP is one of the ways with which the Fed tries to communicate to the public what its thoughts are about the future of the economy, the labor market, inflation, and monetary policy – given the state of today’s economy. If something changes, the Fed reacts, and the prior dot plot goes out the window, and adios.
For the SEP, each of the 19 participants jots down where they see the Fed’s policy rates, unemployment rates, GDP growth, and PCE inflation by the end of the current year and by the end of each of the next several years. The median value of these projections becomes the headline “median projection” for that metric.
Projections in the SEP are neither decisions nor commitments. Members change their projections as the economic situation changes.
Higher interest rates for longer. Today’s median projection for the end of 2025 remained at 3.875%, same as in March, so only 2 cuts of 25 basis points each in 2025, reflecting the Fed’s efforts to grapple with the “uncertainties” – a word that is now standard and plentiful in every Fed communication, from Powell on down.
But there was a shift to no-or-one cut: 7 participants see no cut at all in 2025, up from 4 in March, and 2 participants see only one cut, down from 4. So the the total seeing no or one cut rose to 9 participants. One more participant in that group would lower the median projection to just one cut.
Projections by the 19 FOMC members for the midpoints of the federal funds rate by the end of 2025 (bold = median):
7 see 4.375%: No cuts
2 see 4.125%: 1 cut of 25 basis points
8 see 3.875%: 2 cuts of 25 basis points
2 see 3.625%: 3 cuts of 25 basis points.
Higher forever? The “longer-run” federal funds rate: The median projection for the “longer-run” federal funds rate in 2028 and beyond remained at 3.0%, same as in the SEPs in March and December, and up from 2.9% in September, 2.8% in June, and 2.6% in March last year.
In other words, in 2028 and beyond, the Fed sees the midpoint of the federal funds rate (3.0%) to be 1 percentage point higher than PCE inflation rate (2.0%).
Inflation projections rose further:
- Headline PCE inflation by the end of 2025 jumped to 3.0% (from 2.7% in the March SEP and from 2.5% in the December SEP). The most recent headline PCE price index (for April) was 2.5%.
- “Core PCE” inflation by the end of 2025 jumped to 3.1% (from 2.8% in the March SEP and 2.5% in the December SEP. The most recent actual core PCE price index (for April) was 2.1%.
- Hitting the 2.0% inflation target got moved out to 2028 (from 2027 in the March SEP).
GDP growth projections gets ratcheted down further: The median projection for real GDP growth for 2025 declined to 1.4%, from 1.7% in the March SEP, and from 2.1% in the December SEP.
And the median projections for 2026 GDP growth declined to 1.6%, from 1.8% at the March SEP (2% is the 15-year average real GDP growth of the US).
Unemployment rate gets ratcheted up further: The median projection for the unemployment rate at the end of 2025 rose to 4.5% (up from 4.4% at the March SEP). In May, the unemployment rate was 4.2%. These are still historically low unemployment rates, and the projected differences are minor, but the trend is higher.
Three phrases changed in the FOMC’s statement:
New: “The unemployment rate remains low….”
Old: “The unemployment rate has stabilized at a low level in recent months….”
New: “Uncertainty about the economic outlook has diminished but remains elevated.”
Old: “Uncertainty about the economic outlook has increased further.”
New: “The Committee is attentive to the risks to both sides of its dual mandate.”
Old: “The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen..”
The whole statement:
“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; Alberto G. Musalem; Jeffrey R. Schmid; and Christopher J. Waller.”
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Levelheaded, non-panicked. I would think the powers that be would be happy to have that tone right now. But that’s not what I expect to see on the social media feed.
I think they learned their lesson on panicked rate cuts last year.
Keeping rates the same is fine. Let the market adjust and do its thing.
👍
LOL at those dot pot….still 2 cuts forecasted? Gotta give the market makers a little hopium to not completely crash from withdraw I guess. Not to mention Pow Pow wouldn’t want to draw the irk of the King if they straight out and say “No Cut for you!….next…” like the Soup Nz from Seinfeld…although that would be funny to see if Pow Pow did that to the reports along with him cattle tase them for asking stupid questions.
And the King has pondered becoming Fed Chair himself.
The bond market would luv that.
When are you people in Canada going to stop taking every line of Trump BS seriously? That stuff is a bad joke, it’s kind of funny, just like turning Canada into the 51st state. But there is stuff you have to take seriously, and it’s not that hard to distinguish. We’ve been doing this since 2016. So give it a try.
Trump is full of BS but comments about ending another country’s sovereignty are NEVER funny. Worse, he believes his BS and acts towards it.
Brian,
Jokes about Canada are very funny. I mean, Trump gives us memes. Admittedly his comments about Iran are what is scary. When you control the most powerful military and tell a city of ten million to evacuate when you have already been at limited war that is scary stuff. The markets won’t like another Central Asia/Middle East money pit and if you can’t do it in Iraq then good luck in Iran, which is significantly larger.
The dot plot is for all members. It’s not Powel’s decision or at his direction.
Mr. Wolf writes” “Hitting the 2.0% inflation target got moved out to 2028 (from 2027 in the March SEP).”
The question is if rate cut(s) were factored into this FOMC projection; otherwise the 2% target will be reached on the 12th of never.
I have no firm opinion on how important the 2% target actually is, but the reality seems to be more like: “it’d be nice to dip below 2% every now and then, let’s just not get too far away”
2% inflation, means a 20% loss in purchasing power in ten years. Moreover, for individuals and businesses with no room in their margins, even 2% can break them. Why in the F do we accept this at all?
Because a 2% target allows for enough margin that swings won’t ever cause it to go negative (i.e. “deflation”) which is a very bad economic situation.
2% wasn’t pulled out of thin air; it’s felt among central banks to be the minimum safe target number.
Here here!
And to Brian, deflation is natural in an economy that has deflating bubbles. It’s a good thing.
WB,
We accept it because we are powerless. Oh wait, vote somebody different in, oh wait…..
The only real power I think I have here is moving somewhere else where my money I own here goes a lot further somewhere else. That isn’t an option for most.
Are you nuts? Until the 70s, the Fed literally had one job, price stability, 2% inflation ain’t that but it is at least a facsimile of price stability. It’s outrageous the Fed is OK with inflation above 2% for what is now projected to be 7 years.
I am disappointed that the Fed took no action to bring down the price of Doritos.
Make Doritos Great Again!
At this point, I need to learn how to make Doritos. It was written, back in the 1900s, homemade recipes were cheaper and better tasting. Pray tell my friends of the 1900s is this true?
On sale at Safeway thru next Tuesday
I’m OK with the status quo.
I’ll just keep rolling 3 month T bills in my IRA until the cows come home or Doritos get healthy!
That’s my thinking – T bills for now.
Potatoe chips…processed carbs and unhealthy fats, weight gain, inflammation…what could go wrong?
It is a good plan to not outlive your money! Think of doritoes as insurance that you will never be old and poor!
It’s been 2 years since the most recent rate increase (to 5.25-5.50%), and 2.5 yr since rates were first raised to their current level (4.25-4.50%) in this business cycle.
Given how well the economy has held up since then, at least by most major “hard data” metrics (GDP, U-3, etc.) I’m surprised by how little of the committee sees a substantially higher neutral rate. They’re still stubbornly wedded to 3% +/- a few quarter points.
Somebody is just going to have to print some money, or use Bitcoin, or the cows may not come home.
8 week currently the bestest.
I agree, in so much as this is another “summer of 1978″…
…only this time our DEBT:GDP is a “bit” different.
Hedge accordingly.
Unless the FED knows about some secret engineered downturn that is planned later in the year, I don’t see a reason to cut rates. Maybe I am biased and just not being punished as a saver. Or maybe J is trying to keep the D at bay.
Howdy Youngins. You grew up on ZIRPy and lots and lots of $$$ printing. These current interest rates are really kinda normal believe it or not. Lots of folks remember the olden days with double digit rates. Bet the youngins don t believe that could happen again????? We shall see…….
8-Week 912797QK6 06/24/2025 08/19/2025 4.470% 4.564%
pretty decent. Hope it stays there
That 50 point cut in September of 2024 is hard to walk away from.
When is the country going to belt tighten? Deficits are 6-7% of GDP and debt-to-GDP ratio is rising. Inflation remains above target going on 5 years now. We are a hair away from massive tax cuts.
Do I hear partying on the Titanic? I think I heard a drunk guy say we have to decrease taxes to increase taxes.
Two more rate cuts this year is like two more drinks on the deck.
My 18 percenter is burned into my memory forever!
Why was Donald John Trump again bashing Jerome Powell today and cluelessly attempting to make it personal as to Powell as to what the full 12 member FOMC carefully and thoughtfully decided as to interest rate policy? Trump does know that Jerome is just one vote, doesn’t he?
No, I don’t think he does. (Many here don’t seem to realize that, either.)
“Trump does know that Jerome is just one vote, doesn’t he?”
Thanks. Made me laugh.
“Uncertainty about the economic outlook has diminished but remains elevated.”
“NWS has issued a severe weather watch for the US, but spotter activation may not be necessary”
When Rates move they are going up not down and people will be shocked! Employment rate is staying low and may go lower due to ice. We may not have the best jobs available but we will have uptick in openings. Inflation is due for breakout higher in my opinion. Rates higher~ Dollar short covering rally. Unless…..too many actual risks to name. I actually like Jay Powell, he is deadhead , bonus points for me and he will be mindful of his dual mandate until his term is up. More hawkish going forward with more members migrating to no cuts with each upcoming meeting until capitulation of people migrating to a hike! Thats going to be a fun day to watch!
The obvious BIG elephant in the uncertainty room is tariffs — or, more specifically, the lack of details or deals or anything hinting at successful implementation at hiking tariffs, in order to produce some benefit – is a magic illusion.
The absolute global economic chaos resulting from unhinged mercurial policy uncertainty, is playing out, as a clock ticks down, with basically zero deals achieved — placing the Fed in the logical position of waiting on inflationary impacts to hit — sometime later this year (or whenever).
I think the tariff elephant uncertainty/failure, is also a major factor in the Iran war mongering — as a means to deflect away from tariffs and budget deficit, and decreasing GDP…
The elephant in the room, is competing for attention, as more and more plates are spun by more and more clowns.
The cycle tends to be that an elephant is in the room and not going well then you bring in a hippo riding a unicycle. While proxying Israel against Iran has probably been in the playbook forever it is a convenient time to change the news cycle. Notice how the elephant isn’t making the headlines anymore and onto the hippo?
Israel has no ability to put boots on the ground and would be crushed if it did. All it can do bomb women and children. If that was the plan, it’s a plan for creating a new generation of terrorists.