June flashlight for the FOMC blackout period

Summary

Despite the ongoing tumult around trade policy, the near-term outlook for monetary policy is steady-as-she-goes. We expect the FOMC will leave its target range for the fed funds rate unchanged at 4.25%-4.50% at the conclusion of its upcoming meeting on June 17-18.

"Hard" data show economic activity continues to hold up amid elevated policy uncertainty. Consumer spending started the second quarter with strong momentum, employment continued to expand at a healthy clip in May and the unemployment rate has held steady since March at a level consistent with the FOMC's estimate of full employment. The latest readings on consumer and producer prices point to core PCE inflation inching up to 2.6% on a year-ago basis in May, up from 2.5% in April and still above the FOMC's target of 2%.

Changes to trade policy have ushered in upside risks to both unemployment and inflation. But, with current data showing activity remaining resilient, we expect the post-meeting statement and Chair Powell's press conference will convey that the Committee is still in no hurry to adjust policy. We believe the FOMC will need to see more pronounced softening in the labor market to begin cutting the fed funds rate again this year. We expect to see this softening in the coming months and look for 75 bps of easing by year end.

An update to the Summary of Economic Projections (SEP) will provide a fresh look at what Committee members think lies ahead for the economy and the fed funds rate. We expect the median projection for the fed funds rate at year-end will move up 25 bps to 4.125%, although we would not be surprised if the median dot for 2025 were left unchanged at 3.875%. The same can be said for the 2026 dot moving up 25 bps to 3.625%.

Elsewhere in the SEP, we expect to see projections for inflation at the end of 2025 move a few tenths higher in light of the changes to tariff rates since the March SEP. Estimates for GDP growth are likely to be revised down to only a little over 1% following the first quarter's decline and lingering challenges to growth in the second half of the year. Yet, the median estimate for the unemployment rate may very well remain unchanged at 4.4%, as slower growth in the labor supply and an ongoing reluctance among businesses to cut workers keeps the jobless rate from moving up significantly this year.

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