The Federal Reserve continues to hold steady, stating that uncertainty has decreased but remains high, still expecting two rate cuts this year, indicating an increased risk of stagflation

Key Points:

The Federal Reserve, as the market expected, remained on hold, pausing interest rate cuts for the fourth consecutive meeting.

The resolution statement no longer refers to increased uncertainty in the economic outlook, instead stating that it has weakened but remains high, and removed the increased risks of rising unemployment and inflation, reiterating that net export fluctuations affect data but the economy continues to expand steadily.

The median forecast for interest rates this year remains unchanged, still expecting two cuts of 25 basis points, but the dot plot shows that the number of officials expecting no cuts has increased by three to seven since the last meeting, only one less than the two-cut camp after the predicted number was reduced by one.

The Federal Reserve has lowered its GDP growth expectations for this year and next, forecasting a slowdown in GDP growth to 1.4% this year, while raising unemployment rate expectations and PCE inflation expectations for the next three years, with this year's PCE expectation raised to 3.0%, significantly higher than the recently announced official level of 2.1%.

"New Federal Reserve News Agency": The Fed has opened the door to rate cuts in the second half of the year, stating that a restart of rate cuts requires seeing weakness in the labor market or strong indications that price increases caused by tariffs are relatively moderate; the interest rate forecast highlights internal divisions within the Fed.

U.S. President Trump has been disappointed again; he has repeatedly called for rate cuts, but the Federal Reserve decided not to act this week, similarly expecting only two rate cuts this year, far from Trump's latest call for a 2.5 percentage point cut this Wednesday. Moreover, the Fed's upward revision of inflation expectations and downward revision of GDP expectations suggest that the risk of stagflation in the economy has not only not eased but has increased.

On June 18, Wednesday, Eastern Time, the Federal Reserve announced after the Federal Open Market Committee (FOMC) meeting that the target range for the federal funds rate remains at 4.25% to 4.5%. Thus, the FOMC has decided to pause action for four consecutive monetary policy meetings. The Fed cut rates three times since last September, totaling a reduction of 100 basis points, and has remained on hold since Trump took office in January.

Investors fully anticipated the Fed's continued pause on rate cuts. By the close on Tuesday, the CME's tools indicated that the futures market expected a 99.9% probability that the Fed would keep rates unchanged this week, with a probability of over 85% that there would be no rate cuts at the next meeting in July, and a slightly over 63% probability of at least a 25 basis point cut in September. Last week's U.S. CPI and PPI data for May both showed a slowdown in inflation, warming expectations for two rate cuts by the Fed this year.

The Fed's decision this time remains largely unchanged from the last meeting but indicates that uncertainty in the economic outlook has somewhat diminished. The dot plot reflecting Fed officials' expectations for the interest rate outlook shows a more hawkish stance regarding the prospects for rate cuts this year, as the number of officials expecting no cuts has increased.

Steve Englander, Global Head of G10 FX Research at Standard Chartered Bank, commented that the goal of this FOMC meeting was to expand the possible range of Fed policy responses while making no commitments to action.

Nick Timiraos, a journalist known as the "New Federal Reserve News Agency," pointed out after the Fed meeting that the Fed has opened the door to rate cuts in the second half of this year. Fed officials are watching to see if companies will respond to rising costs from tariffs by cutting profits or raising prices Timiraos believes that in order to restart interest rate cuts, Federal Reserve officials may need to see a weak labor market or stronger evidence that price increases caused by tariffs will be relatively moderate.

Timiraos also noted that the new interest rate forecasts released after this meeting highlight the divisions among the 19 Federal Reserve officials present. He mentioned that ten of them expect the Fed to cut rates at least twice this year, down from the number at the last forecast released in March. Additionally, seven expect no rate cuts, an increase from the last meeting.

Uncertainty about the economic outlook has diminished but remains elevated; risks of rising unemployment and inflation have increased

The Federal Reserve's decision statement this time largely followed the content of the last FOMC statement from May. There were three main changes. One significant change was the wording regarding uncertainty about the economic outlook.

Last time, the statement said, “Uncertainty regarding the economic outlook has further increased,” adding the word “further” compared to the previous statement. This time, the statement changed to:

“Uncertainty regarding the economic outlook has diminished, but remains elevated.”

Following this adjustment, the statement reiterated that the FOMC committee is focused on the two-sided risks it faces in achieving its dual mandate of maximum employment and price stability, leading to the second major change.

Last time, the statement added half a sentence, stating that the FOMC “judged that the risks of rising unemployment and inflation have increased.” This time, the half-sentence regarding the increased risks of both unemployment and inflation was removed.

The third change was in the assessment of unemployment. The last statement noted that the unemployment rate in the U.S. “has stabilized at a low level in recent months,” while this time, the statement simply referred to the unemployment rate as “still low.”

Reiterating the impact of net export fluctuations on data, but the economy continues to expand steadily; balance sheet reduction continues

In commenting on the economy, similar to the last statement, this time it also stated: “Although fluctuations in net exports have affected the data, recent indicators show that economic activity continues to expand steadily.” This time, it reiterated the robustness of the labor market and that inflation remains elevated.

The statement continued to emphasize that the Federal Reserve will continue to reduce its holdings of U.S. Treasury securities, agency debt, and agency mortgage-backed securities (MBS).

Since April of this year, the Federal Reserve has further slowed the pace of its balance sheet reduction (quantitative tightening, QT). Specifically, it has lowered the monthly redemption cap for U.S. Treasury securities from $25 billion to $5 billion, while maintaining the monthly redemption cap for agency debt and agency MBS at $35 billion.

Subsequently, the Federal Reserve has not changed the balance sheet reduction guidance in the last two meetings, indicating that the reduction will continue at the above pace.

This statement shows that, like the last meeting, all voting members of the FOMC supported the decision made at this meeting.

The following red text highlights the deletions and additions in this decision statement compared to the last one.

This Year's Interest Rate Forecast Median Unchanged, But Three More Officials Expect No Rate Cuts

The median value of the Federal Reserve officials' interest rate forecast released after Wednesday's meeting shows that the officials have kept their outlook for this year's interest rates unchanged, while raising the forecasts for the next two years. This means that compared to the interest rate forecast released by the Federal Reserve in March of this year, the expected rate cuts for the next two years are lower than the previous forecast.

The specific median forecasts are as follows:

The federal funds rate at the end of 2025 is 3.9%, unchanged from the March expectation.

The federal funds rate at the end of 2026 is 3.6%, up from the March expectation of 3.4%.

The federal funds rate at the end of 2027 is 3.4%, up from the March expectation of 3.1%.

The longer-term federal funds rate is 3.0%, unchanged from the March expectation.

Based on this median interest rate, Federal Reserve officials currently expect two rate cuts of 25 basis points this year, which is exactly the same as the prediction made in March.

Compared to the last dot plot released by the Federal Reserve in March, the updated dot plot released after Wednesday's meeting shows a more hawkish view within the Federal Reserve regarding rate cuts this year.

This time, three more officials expect no rate cuts this year, bringing the total number to just one less than the camp predicting two rate cuts, with the proportion rising to nearly 37%. The number of officials expecting two rate cuts decreased by one to eight, with the proportion dropping from 47% to 42%, and the number expecting one rate cut decreased by two.

Among the 19 Federal Reserve officials providing forecasts:

This time, seven officials expect no rate cuts this year, compared to four last time;

This time, two officials expect one rate cut this year, compared to four last time;

This time, eight officials expect two rate cuts this year, compared to nine last time;

As with last time, there are still only two officials expecting three rate cuts this year.

It can be seen that last time, a total of 11 officials expected at least two rate cuts this year, while this time, ten officials have such a prediction. Last time, a total of 16 officials expected at least one rate cut this year, while this time, 12 officials have such a prediction.

The following chart shows the changes in the interest rate expectations of Federal Reserve officials reflected in the dot plot, with yellow dots representing the June dot plot expectations and gray dots representing the March dot plot expectations.

Downgraded GDP Forecasts for This Year and Next, Upgraded Unemployment Rate and PCE Inflation Forecasts for This Year and Next Three Years

The economic outlook released after the meeting shows that Federal Reserve officials have downgraded GDP growth forecasts for this year and next, while upgrading unemployment rate forecasts and PCE inflation as well as core PCE inflation forecasts for this year and the next three years The specific forecasts are as follows:

• The expected GDP growth rate for 2025 is 1.4%, down 0.3 percentage points from the March forecast of 1.7%. The expected growth rate for 2026 is 1.6%, down from the March forecast of 1.8%. The expected growth rates for 2027 and the longer term are both 1.8%, unchanged from the March forecast.
• The expected unemployment rate for 2025 is 4.5%, up 0.1 percentage points from the March forecast of 4.4%. The expected rates for 2026 and 2027 are 4.5% and 4.4%, respectively, with both March forecasts at 4.3%. The longer-term unemployment rate expectation is 4.2%, unchanged from the March forecast.
• The expected PCE inflation rate for 2025 is 3.0%, up 0.3 percentage points from the March forecast of 2.7%. The expectation for 2026 is 2.4%, up from the March forecast of 2.2%. The expected growth rate for 2027 is 2.1%, compared to the March forecast of 2.0%. The longer-term expectation is 2.0%, unchanged from the March forecast.
• The expected core PCE for 2025 is 3.1%, up 0.3 percentage points from the March forecast of 2.8%. The expectation for 2026 is 2.4%, up from the March forecast of 2.2%. The expected rate for 2027 is 2.1%, compared to the March forecast of 2.0%.

Catarina Saraiva, a reporter covering the U.S. economy, commented that the Federal Reserve's revised PCE inflation expectations are significantly higher than the recently published official levels. At the end of last month, the U.S. reported a year-on-year increase of 2.1% in the April PCE price index, while the Federal Reserve's revised PCE inflation rate for this year is 3%.

Saraiva believes that on the surface, the Federal Reserve's current forecasts are difficult to align with expectations for two rate cuts, but Federal Reserve officials clearly believe that this high inflation is only temporary, with the inflation rate expected to fall to 2.4% next year and to 2.1% by 2027, which is the year after next.