The Federal Open Market Committee (FOMC) voted to keep the federal funds rate target range unchanged at 4.25% – 4.50%. There were no dissents.

Changes to the FOMC Statement:

• The Federal Reserve (Fed) assessed uncertainty about the economic outlook as diminished but remaining elevated.
• The Fed edited their assessment of the labor market by removing the statement that the unemployment rate has stabilized at low levels, saying instead that it remains low.
• The statement removed the comment that the risks of higher unemployment and higher inflation have risen but the committee remains attentive to the risks to both sides of its mandate.
• The statement maintained its existing forward guidance. The FOMC is prepared to adjust the stance of policy as necessary.

Summary of Economic Projections:

• Investors received FOMC participants’ outlooks for employment, growth, and inflation. The participants upgraded risk to Unemployment and Inflation.
  • The Core PCE inflation forecast was increased to 3.1% in 2025, 2.4% in 2026, and 2.1% in 2027. The number of participants who saw upside risks to their inflation forecast fell to 14 out of 19 members.
  • The Committee’s growth forecast was downgraded to 1.4% in 2025 and 1.6% in 2026. The number of participants who saw downside risks to their growth forecast fell to 13 out of the 19 members.
  • The unemployment rate forecast increased to 4.5% in 2025 and 2026. The 2027 rate also increased to 4.4%. The number of participants who saw upside risks to their unemployment rate forecast fell to 14 out of 19 members.
• The median expectation for the path of the Fed Funds rate was little changed.
  • The median member continues to expect 50bps of cuts in 2025. Beyond 2025, the median path now has one less cut in 2026, resulting in a higher level of policy at the end of 2027 (up from 3.125% to 3.375%). In other words, the cumulative easing expected by the median participant over the forecast horizon declined from 125bps to 100bps. The long run dot was unchanged at 3%.

Key Quotes from Chair’s Press Conference:

• Current and expected policy stance:
  • “Again, look at labor force participation, look at wages, look at job creation. They're all at healthy levels now. I would say you can see perhaps a very, very slow continued cooling. But nothing that's troubling at this time. But we watch it very, very carefully. So overall, again, the current stance of monetary policy leaves us well-positioned to respond in a timely way to economic developments for now. And we'll be watching the data carefully.”
  • “But remember, as we see more data, we're going to learn more about where inflation is headed. When it is time to look at normal -- at resuming our normalization process, the differences you see should be smaller, because we'll have seen actual data. Right now it's a forecast in a foggy time. That's the first part, forecast. Secondly, people can look at the same data and evaluate the risks differently. And that includes the risk of higher inflation, the risk it'll be more persistent, the risk the labor market will weaken. People will have different assessments of that risk. You put that in there, too. So, those are the two ways that -- the two things that drive these things (the dot plot). Remember though, as I mentioned earlier, with uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction.”
  • “A backward-looking look would lead you toward neutral.”
• Inflation, Inflation Expectations, and the Impact from Tariffs:
  • “We've had three months of favorable readings since January and February, and that's highly welcome news. Part of that is core services, both housing services and non-housing services, have really been grinding down toward levels that are consistent with 2% inflation. So that's the good news. We've had goods inflation just moving up a bit and, of course, we expect as you point out, we do expect to see more of that over the course of the summer. It takes some time for tariffs to work their way through the chain of distribution to the end consumer. A good example of that would be goods being sold at retailers today may have been imported several months ago before tariffs were imposed. So we're beginning to see some effects. We expect to see more. We do also see price increases in some of the relevant categories like personal computers and audio visual equipment and things like that that are attributable to tariff increases. In addition, we look at surveys of businesses and there are many of those. And you do see a range of things. But many, many companies do expect to put all or -- some of all of the effect of tariffs through to the next person in the chain. And ultimately, to the consumer. Today, the amount of the tariff effects -- the size of the tariff effects, their duration and the time it will take are all highly uncertain. So that is why we think the appropriate thing to do is to hold where we are as we learn more. And we think our policy stance is in a good place where we're well-positioned to react to incoming developments.”
• Fiscal Policy, Growth Risks and Uncertainty:
  • “If you think about it, tariff uncertainty, uncertainty really peaked in April. And since then has come down. Acknowledging, It's diminished but still elevated. It's uncertainty. I think that's an accurate statement.”
  • "We don't sit around and debate or really discuss (fiscal policy). We take fiscal policy as fully exogenous. And so we actually really didn't talk about the bill or the contents of it. It's still evolving. When it gets closer . . . Remember also we have a very large economy. And the effects will be at the margin. And I expect that they may already be in. But they will be in by the next meeting. We'll make an estimate. But it's not a major thing. It's nothing that we discuss. May have been mentioned a couple of times as something that's coming in, but I think the outcome -- we don't know the outcome yet. So hard to be real specific."

Our View:

• In the absence of clear labor market weakness and with long term inflation expectations anchored, the Federal Reserve (Fed) is likely to remain on hold to assess the path for inflation. Since the Federal Open Market Committee (FOMC) last met on May 7^th, the labor market has slowed at a nonthreatening pace and is still in balance. Consumer and business sentiments have improved slightly but remain depressed from a historic perspective, and uncertainty remains elevated. The May CPI report also came in softer than expected, showing little tariff passthrough except for a few select subcomponents. We expect there to be more tariff passthrough in the subsequent inflation data and we also expect the Fed to look through tariff related inflation as long as it is perceived to be a one-time price level reset that does not result in unanchored inflation expectations. This will take time to determine.
• Despite downside risks to the U.S. economy remaining elevated, we retain our base case of sub-trend growth. The U.S. economy has proven resilient so far in this cycle and corporate balance sheet fundamentals suggest businesses have a strong starting point to manage higher costs. Nevertheless, we do expect job growth and economic activity to moderate and the Fed to respond with further rate cuts later this year. If this mix of high tariff rates and low confidence persists further into the summer, we expect economic outcomes to worsen.
• We maintain our trading range for the ten-year U.S. Treasury (UST) yield at 3.75% - 4.50%. With the central bank maintaining its current stance but with an easing bias, coupled with a balanced labor market, ongoing wage moderation, and continued service disinflation, this should limit the extent in which yields rise significantly even with inflation expected to increase in the coming months due to tariffs. The threshold for the Fed to shift from an easing bias to a hiking one is quite high. Should the labor market begin to weaken substantially, we expect the ten-year U.S. Treasury yield to move into a lower trading range, prompting the Fed to consider larger rate cuts to quickly achieve a neutral Fed Funds rate. Additionally, a fiscal stimulus package from Congress that exceeds expectations could pose an upside risk to our projected yield range.

Forecasts, projections and other forward-looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.

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