Holding pattern: the Fed’s continued pause as uncertainty remains elevated
Summary
On Wednesday, June 18, 2025, the Federal Open Market Committee (FOMC) decided to stay the course, holding Fed Funds at the current target range of 4.25-4.50% with a unanimous vote. Within the FOMC statement, the Fed noted that economic uncertainty has “diminished but remains elevated,” as it continues to evaluate the inflationary impacts of recent tariff policy in conjunction with economic growth. Compared to forecasts in March, the Fed’s near-term inflation expectations moved higher to 3.1%, up from 2.8%. The Fed also expects slower economic growth, projecting GDP expanding just 1.4% this year, down from 1.7%. The statement remained consistent with the Fed’s recent data dependency, highlighting its intention for new labor market data, inflation readings, and geopolitical events to inform future policy decisions. While the statement did not mention tariffs, geopolitical conflict, or oil, Chair Powell fielded questions in the press conference on these topics noting, “we are adapting in real time.” The accompanying Summary of Economic Projections left rate cut expectations for 2025 unchanged but showed fewer cuts for 2026 and 2027. The dot plot still predicts two rate cuts before the end of this year." Notably, seven FOMC members now anticipate no change in policy rates for 2025, an increase from four members in the March dot plot.
Impact on rates
Earlier this morning, equities ticked up while swap rates were down on the day as housing start data fell to its lowest level in five years (Annualized: 1.256M, MoM: -9.8%). During the press conference, equities pared back this morning’s gains as Chair Powell highlighted inflation’s stickiness above the 2% target and the range of possibilities for tariffs’ influence on prices and economic growth. Chair Powell also mentioned the noticeable cooling of both headline and core CPI and PPI in May as a favorable outcome, but he currently expects prices to increase in the coming months as tariffs trickle down to the consumer level. The Fed’s current priority is to ensure short-term inflation does not become persistent. Given today’s unique market conditions, the Fed remains unsure of how and when the potential inflationary impacts of tariffs will materialize. Chair Powell even noted the possibility that their dual mandate objectives of maximum unemployment and price stability may become in tension.
While recent labor market data sent mixed signals showing potential cracks with last week’s soft Initial Jobless Claims print, Chair Powell cited the 4.2% unemployment rate as healthy and not requiring additional support. This allowed the Fed to comfortably hold rates as they continue to monitor economic performance. Chair Powell noted that the Fed’s policy decisions to date have positioned it well to adapt to changing market conditions. After the FOMC meeting concluded, swap rates remained slightly down on the day.
Source: Chatham Financial
Source: Chatham Financial
Moving forward
Looking ahead to the next FOMC meeting on July 30, the market is largely anticipating the Fed to hold rates steady. Currently, a 25bp rate cut is expected in October, with another to follow in December.
Chair Powell expects to gain further insight and gather data points as the effects of this spring’s tariffs come to fruition. With important "Liberation Day" tariff deadlines quickly approaching in early July, the Fed may develop a better picture of the tariff landscape ahead of its next meeting to evaluate the appropriate policy response. While the June dot plot indicates an upward shift in longer-term rate expectations, Chair Powell noted during the press conference that, “with uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction.” History has shown the Fed’s projected path should be viewed more as a developing estimate than a firm course of action. With the Fed on the lookout for an inflationary resurgence, Chair Powell maintained an optimistic tone on the economy’s performance this year to date and its prime position to react to incoming developments.
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Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
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