by Calculated Risk on 6/15/2025 09:31:00 AM
Most analysts expect no change to FOMC policy at the meeting this week, keeping the target range at 4 1/4 to 4 1/2 percent. Market participants currently expect the FOMC to also be on hold at the July meeting, with the next rate cut in September, and a second rate cut in December.
The Fed has made it clear that the policy rate will remain unchanged at its June meeting.
We expect the FOMC to make some changes to the language around uncertainty in the
statement. The May statement said that “Uncertainty about the economic outlook has
increased further”. Given the 115pp reduction in bilateral US-China tariffs on May 12,
we think a more appropriate characterization could be: “Uncertainty about the economic
outlook remains elevated”.Per the usual, markets will be focused on the Summary of Economic Projections (SEP).
The March SEP was pre-“Liberation Day”. Therefore, meaningful revisions to the 2025
forecasts are likely. However, we think there is too much uncertainty around policy along
multiple dimensions (most notably trade and fiscal) for the Fed to do a wholesale
reassessment of its views. So we think the forecasts for 2026 and beyond will remain
largely unchanged.
emphasis added
From Goldman:
We are not making any changes to our Fed forecast and continue to expect the first of three normalization cuts in December, followed by two more in 2026 to a terminal rate of 3.5-3.75%. An earlier cut is possible if the economy deteriorates more than we expect or if inflation continues to surprise to the downside, but we think that the peak summer tariff effects on the monthly inflation prints will most likely be too fresh for the FOMC to cut before December.
The FOMC participants’ midpoint of the target level for the federal funds rate is now at 4.0% at the end of 2025 (3.9%-4.4%) and the long run range is 2.6% to 3.6%. This is fewer rate cuts than market participants expect.
Since the last projections were released, economic growth has been below expectations (but distorted), the unemployment rate was close to expectations, and inflation at expectations.
The BEA’s advance estimate for Q1 GDP showed real growth at -0.2% annualized. There is a wide range of estimates for Q2 GDP, but it is forecast to be over 3.0% (as Q1 distortions reverse). That would put real growth on pace to be in the range of the March FOMC projections for Q4 over Q4.
However, Q2, Q3 and Q4 all saw solid growth last year – and we haven’t seen the impact of policy changes on hard data yet – so there is still significant uncertainty about the economy this year.
| GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Mar 2025 | 1.5 to 1.9 | 1.6 to 1.9 | 1.6 to 2.0 | |
| Dec 2024 | 1.8 to 2.2 | 1.9 to 2.1 | 1.8 to 2.0 | |
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
The unemployment rate was at 4.2% in May after averaging 4.1% for Q1. The forecast for the Q4 unemployment rate is likely low.
| Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Mar 2025 | 4.3 to 4.4 | 4.2 to 4.5 | 4.1 to 4.4 | |
| Dec 2024 | 4.2 to 4.5 | 4.1 to 4.4 | 4.0 to 4.4 | |
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.
As of April 2025, PCE inflation increased 2.1 percent year-over-year (YoY). There will likely be some increase in PCE inflation from policy, but this appears to in the forecast range.
Without policy changes (tariffs) it appears inflation would be well below the FOMC forecast!
| Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Mar 2025 | 2.6 to 2.9 | 2.1 to 2.3 | 2.0 to 2.1 | |
| Dec 2024 | 2.3 to 2.6 | 2.0-2.2 | 2.0 | |
PCE core inflation increased 2.5 percent YoY in April. This is in the range of FOMC projections for Q4.
| Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2025 | 2026 | 2027 | |
| Mar 2025 | 2.7 to 3.0 | 2.1 to 2.4 | 2.0 to 2.1 | |
| Dec 2024 | 2.5 to 2.7 | 2.0-2.3 | 2.0 | |
