Weekly economic commentary: FOMC still in wait-and-see mode

Summary

United States: One day or another: FOMC still in wait-and-see mode

• In this week's most closely-watched release, the FOMC elected to maintain its federal funds rate target at 4.25%–4.50%, citing continued economic resilience and still-elevated inflation. With the incoming data broadly continuing to point to a U.S. economy that is slowing but not grinding to a halt, the FOMC remains in a holding pattern as it awaits a fuller picture of how tariffs play out in the data.

• Next week: Home Sales (Mon. & Wed.), Durable Goods (Thu.), Personal Income & Spending (Fri.)

International: More daylight, more monetary policy decisions

• The days got longer this week, and equally long was the list of foreign central banks meeting to deliver monetary policy decisions. The Bank of Japan, Bank of England and Chilean central bank held rates steady, as expected, while Norway's central bank surprised market participants with a rate cut. The Swiss National Bank and Sweden's central bank both delivered rate cuts, and the Brazilian central bank hiked rates, in our view, for the last time this easing cycle.

• Next week: Eurozone PMIs (Mon.), Canada CPI (Tue.), Banxico Policy Rate (Thu.)

Interest rate watch: Outlook for Fed policy remains highly uncertain

• Although the median dot in the FOMC's "dot plot" continues to look for 50 bps of rate cuts by the end of the year, Chair Powell suggested in his press conference after this week's FOMC meeting that the outlook for monetary policy is highly uncertain.

Credit market insights: A compression in spreads

• Corporate bond markets have settled into a more stable rhythm in recent weeks, following a period of heightened volatility earlier this year. Credit investors are still focusing on potential risks, but the extreme high-risk sentiment has cooled. For now, spreads are continuing on their previous trend of cautious optimism.

Topic of the week: What's behind the recent rise in home supply?

• Resale inventories are normalizing. The reasons? Weak demand as a result of persistently high mortgage rates, the return to office, easing of the mortgage rate lock-in effect, rising "hidden" homeownership costs and cooling labor market all appear to be behind the climb in supply.

US review

One day or another: FOMC still in wait-and-see mode

The most closely watched event of the week was the Federal Open Market Committee’s June policy announcement. The Committee elected to maintain its federal funds rate target at 4.25%–4.50%, citing continued economic resilience and still-elevated inflation (chart). While market volatility has eased and economic uncertainty has diminished somewhat since May, the Committee still characterizes the level of uncertainty as “elevated.” As discussed in further detail in Interest Rate Watch, the FOMC also released an updated Summary of Economic Projections. The updated SEP reflects a more stagflationary outlook, with lower GDP growth and higher core PCE inflation and unemployment forecasts for 2025 and 2026. Further, the Committee’s latest “dot plot” shows the median member still expects 50 basis points (bps) of rate cuts by year end-2025, with projected cuts for 2026 reduced from 100 bps to 75 bps. Trade policy uncertainty continues to present a hurdle in the outlook for the FOMC. Discussing the impact of tariffs on the data thus far, Chair Powell remarked “we’re beginning to see some effects, and we do expect to see more of them over the coming months”. The expectation for further impact from tariffs is keeping the FOMC in a “wait-and-see” mode, even as inflation data have been, on balance, favorable since the prior meeting.

This cautious stance on the outlook from the FOMC extends to the consumer, as when asked about tariffs in his post-meeting press conference, Chair Powell noted that “ultimately, the cost of the tariff has to be paid, and some of it will fall on the end consumer.” This is starting to be borne out in the data. Retail sales fell 0.9% in May, dragged down by a sharp 3.5% decline in auto dealer sales, the largest monthly drop so far in 2025. April’s previously reported gain was also revised down to a slight decline, indicating a weaker pace of sales than initially thought. Control group sales—which exclude autos, gas, building material stores and restaurants—edged up 0.4%, but that may overstate the strength in underlying consumer spending at present, as most of the May weakness came from categories excluded from the measure (chart). Outside of declines in several goods categories, restaurant and bar sales declined 0.9% in May, a worrying sign for the outlook of services spending. Overall, May’s retail sales report hints at a modest softening in consumer demand, particularly for bigger ticket purchases such as autos, which may partially reflect payback after the initial tariff-induced pull forward earlier this year.

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