The Federal Reserve remains steady, with risks of stagnation in economic and inflation expectations
The Federal Reserve decided to maintain the federal funds rate at 4.25% to 4.5% during the June monetary policy meeting, in line with market expectations. This marks the sixth consecutive time since December of last year that the rate has been kept unchanged. Despite facing risks of rising inflation and slowing economic growth, the committee still anticipates two rate cuts within the year. The latest economic forecast shows that the expected GDP growth for the U.S. in 2025 has been revised down to 1.4%, while the PCE inflation expectation has been revised up to 3%. The Federal Reserve stated that economic growth is robust, but inflation remains slightly high. Powell emphasized that they will continue to monitor economic data
According to the Zhitong Finance APP, the Federal Reserve decided to maintain the federal funds rate in the target range of 4.25% to 4.5% during its interest rate meeting on Wednesday (June), in line with the market's previous expectations. This marks the sixth consecutive time since last December that the rate has been kept unchanged. Although the Federal Reserve pointed out the risks of rising inflation coexisting with slowing economic growth, the committee still maintains the expectation of "two rate cuts within the year."
The "dot plot" released at this meeting shows that there are still significant differences among Federal Reserve officials regarding the direction of interest rates. Among the 19 participants, 7 indicated that they do not support a rate cut this year, an increase from 4 in March. However, the voting result for the policy statement was still unanimous, indicating a certain level of consensus within the Federal Reserve on how to respond to the current macroeconomic environment.
At the same time, the Federal Reserve adjusted its medium- to long-term interest rate path: it reduced the expectation of rate cuts once each in 2026 and 2027, suggesting that the pace of rate cuts may slow after 2025. The latest forecast indicates that by 2027, the median federal funds rate will drop to about 3.4%.
The Federal Reserve also released its latest economic forecasts, reflecting concerns about stagflation: the U.S. GDP growth expectation for 2025 was revised down from 1.7% to 1.4%; the PCE (Personal Consumption Expenditures) inflation expectation was raised to 3%, with core PCE (excluding food and energy) rising to 3.1%, both up 0.3 percentage points from the March forecast; the unemployment rate expectation was also raised by 0.1 percentage points to 4.5%, higher than the current level of 4.2%.
The Federal Reserve stated in its announcement that the overall U.S. economy is still growing at a "steady pace," with the job market maintaining a "low unemployment rate," but inflation remains "somewhat elevated." Despite recent trade policy and Middle East tensions causing market fluctuations, the committee believes that the uncertainty surrounding the economic outlook "has eased somewhat but remains high."
Powell stated at the post-meeting press conference that the current policy "has ample space and patience," and the Federal Reserve will continue to observe the evolution of economic data, "waiting for clearer signals before making any adjustments."
The Federal Reserve did not signal immediate action, and President Trump criticized Powell and the Federal Reserve team again that day for not actively cutting rates, stating that the federal funds rate should be lowered by at least two percentage points, bluntly calling Powell "stupid."
One of the reasons Trump wants to cut rates quickly is the high cost of debt financing. As of now, the U.S. government's annual debt interest expenditure is expected to reach $1.2 trillion, exceeding all federal budget expenditures except for Social Security and Medicare. Since the Federal Reserve implemented its last rate cut last December, U.S. Treasury yields have remained high, putting heavy pressure on the budget deficit. The U.S. fiscal deficit in 2025 may approach $2 trillion, accounting for more than 6% of GDP.
After the interest rate decision was announced, the U.S. stock market showed little volatility. Market analysts believe that although this meeting did not provide a clear signal of a shift, the Federal Reserve overall still leans towards a "dovish" stance. Recent weak economic data also opens up space for rate cuts within the year: May retail sales fell nearly 1%; the labor market is softening, with long-term unemployment rising; the real estate market is cooling, with housing starts dropping to a five-year low Northlight Asset Management Chief Investment Officer Chris Zaccarelli stated: "The Federal Reserve is currently like 'treading water', observing whether tariffs are pushing up inflation while assessing whether the labor market is deteriorating. Whichever aspect wavers first in their dual mandate will determine the direction of their next action."
