As widely expected, the Federal Reserve kept rates unchanged at today’s meeting. The main event at today’s meeting was the release of new economic projections from FOMC participants, which sheds light on the committee’s decisions in future meetings. The previously published projections came in March 2025, before the shocking tariff developments in April.
The federal-funds rate has been maintained in the target range of 4.25%-4.50% since it was cut by 1 percentage point from September to December 2024. The rate had been at a 5.25%-5.50% range from July 2023 to September 2024—which, having risen from nearly 0% during the pandemic, constituted the largest rate hike in over 40 years.
Current rates are still well above the prepandemic (2017-19) average federal-funds rate of 1.7%. That sets the expectation that rates will eventually fall further.
The median FOMC member continues to expect the rate to be cut by 50 basis points in 2025 to a target range of 3.75%-4.00%. But expectations for the federal-funds rate at year-end 2026 and 2027 have risen to 3.50%-3.75% and 3.25%-3.50%, respectively, up by 25 basis points compared with the prior projections. Moreover, despite the unchanged median for 2025, seven of 19 participants in the FOMC projections now expect no rate cut this year, up from four participants as of March.
The FOMC projection for the fourth-quarter 2025 core PCE inflation rate (year-over-year) has risen to 3.1%, up from 2.8% previously. On the one hand, not only has the inflation data yet to register much impact from tariffs, but it’s been downright soft in recent months, with core PCE prices likely averaging 1.4% annualized in the three months ending in May. On the other hand, Powell stated that tariffs are still “likely to push up prices,” and we agree with this assessment.
Equally importantly, there’s still much uncertainty about whether any upward impulse to inflation from tariffs will constitute a onetime shock or more persistent effects. The latter would require a firmer response from the Fed.
The FOMC projections for real GDP growth in the fourth quarter of 2025 (year over year) did drop to 1.4% from 1.7%. But while the central bank assesses growth as slowing, it seems to view this primarily as a negative supply shock (from the tariffs). In principle, while the Fed should respond to a negative demand shock by easing monetary policy, that’s not the case for a negative supply shock.
For now, we continue to expect two rate cuts this year, as we expect the uncertainty engendered by the tariffs to constitute a significant negative demand shock, which will call for mild monetary policy easing despite an acceleration in inflation. In terms of the timing, however, it does now look more likely that the first cut will come in September, rather than July as we previously expected.
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