FOMC Commentary – June 18, 2025

June 18, 2025 – The Federal Reserve’s Federal Open Market Committee (FOMC) today confirmed the current monetary policy, keeping the target Fed Funds rate in the 4.25%-4.5% range and continuing to reduce the Fed’s holdings of US Treasuries and agency debt (“the balance sheet.”) Sometimes too much attention is paid to the placement of certain statements in the Federal Open Market Committee Interest Rate Decision Press Release. Nevertheless, it seems notable that the opening sentence of the press release immediately referenced swings in the economic data, specifically, the export data.  Perhaps it is understandable that the “data-driven” Fed would choose to highlight the difficulties in being data-driven at the moment. At the same time, it is also notable that the FOMC highlighted (in the fourth sentence!) that uncertainty about the economic outlook is elevated but reduced. This is a significant departure from one of the last FOMC meetings in early May.

A key part of this FOMC press release is the Summary of Economic Projections (SEP). This is the first SEP released after “Liberation Day” and other major tariff announcements. A comparison with the last SEP released in March shows the committee’s median projection lowering the US GDP growth rate for 2025 and 2026 to 1.4% and 1.6%, respectively, and raising the expected unemployment rate. The increase in the unemployment rate is insignificant, and throughout the forecast range, including 2027, the unemployment rate is projected to remain well below 5%. However, there is an unusually wide range of estimates on GDP growth in 2026-2027, with some FOMC members clearly signaling recession conditions in their forecast of less than 1% economic growth in both 2026 and 2027. The SEP did raise the estimated inflation rate for 2025 to 3%, and there seems to be a relatively uniform opinion among policymakers that inflation will be slightly higher this year and next than was forecast in March. This may have contributed to the other SEP forecast of note: the range, possibly best described as a “split,” of opinion on whether to leave interest rates unchanged in 2025 and early 2026 or whether to cut interest rates two or three times.

The press conference eventually resolved into a discussion of these SEP forecast ranges. As Chairman Powell himself acknowledged, the diversion in the “dot plots” (the unidentified forecasts of individual FOMC members) reflected “a lot of diversity of opinion,” although there was “strong support for today’s decision.” A series of questions probing the thinking of FOMC members on growth, unemployment, inflation, and interest rates were effectively captured by Chairman Powell’s discourse on the difference between uncertainty and risk. On July 9, deferred tariffs came back into the picture. There is a war in the Middle East right now, and there is a tax and spending bill in Congress, where agreement is hard to come by… How can it be that the FOMC cited declining uncertainty?  Chairman Powell’s answer was masterful, but possibly unappreciated; (paraphrasing) uncertainty is about unknown probabilities and outcomes, and risk is about known, measurable probabilities, with the wide ranges in the SEP forecasts reflecting differences of opinions on the size and timing of the risks.  Despite the cogent answer, it seemed like there remained (understandably) a sense that uncertainty itself continues to be a problem.

There was a healthy debate, not for the first time, about the desirability of the Federal Reserve setting monetary policy in anticipation of economic developments. This appeared to take on new dimensions because of the perceived labor market softening and the much weaker-than-expected housing starts numbers released today. Chairman Powell, however, rejected the notion that the US labor market was doing anything other than staying “in balance,” with only minor “slowing”, and emphasized that the structural problems in US housing markets are not something the Fed can address. Yet, as is so often the case with this Fed, the messaging became muddled over the course of the press conference.  In forcefully stating that “monetary policy has to be forward-looking,” Chairman Powell left it to the audience to figure out how that forward-looking policy imperative can be reconciled with the reluctance to forecast and the emphasis on being data-driven when the data itself is backward-looking.  In a somewhat cringey exchange of thoughts, Powell indicated that “no one holds these [forecasted] rate paths with a lot of conviction,” “we will learn a great deal over the summer,” and (in response to yet another question about the SEP forecast ranges and when the forecast range might become narrower, with members having greater “certainty” in their forecasts)  “at some point it [the forecast] will become clear,  I just can’t tell you when that might be.”

The Wall Street Journal asked a logical question about moving interest rates to a more neutral stance since the economy is, as described by Chairman Powell, at full employment and without the alarming inflation once feared. Powell, earlier in the press conference, had again described current interest rates as “modestly restrictive.” “That moving to a neutral stance] would be backward-looking. We can’t do that. We have to be forward-looking.” The only way to square this circle is to accept that the Fed knows that monetary policy needs to be forward looking but, at the moment, doesn’t know how to look forward, constructively.