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What To Expect:

The Fed has signaled a hold on interest rates not just in June, but throughout the summer. With risks to the inflation trajectory on the horizon, remaining uncertainty in tariff and fiscal policy, and a low unemployment rate, FOMC members are going to feel more confident in their decision to wait until the effects of policy changes show themselves before signaling a move in rates. The Fedspeak before this meeting has been very similar to the Fedspeak before the previous meeting—it’s just a waiting game for the inflation data to show the effect of tariffs or the labor market starts to show signs of breaking.

The June meeting comes with another round of the SEP dots. With further rate normalization pushed off further into the year, we expect some upwards movement in the dots, but not too much. Our baseline case sees the median dot hang on to two cuts for this year, with one of the one-cut dots (Kashkari) moving to zero cuts, and one of the two-cut dots (Harker) moving to one cut. Pushing back the potential start of rate cuts to September still provides ample time for two cuts this year.

There isn’t much room for a more dovish scenario; the March SEP is probably the upper bound on how dovish this round of dots can be. In that scenario, we see most members keeping the same projection, with one of the three-cut dots moving to two (with one superdove, which we’ve seen in the past, staying at three). In a more hawkish scenario, we see a median dot of one cut, with more upwards movement in the dots. This scenario sees Collins (but Musalem and Bostic would also be plausible) moving to no cuts and Barkin and Powell moving to one cut.

Currently, we don’t expect anyone to pencil in a rate hike in any scenario; we haven’t seen any Fedspeak about a rate hike (Kashkari referenced the notion that strict interest rate rules would lead to a rate hike, but did so to dismiss using such rules) and signaling a hike would contradict the message that they’re waiting to decide.

Latest Fedspeak And Dot Projections

The Developments That Matter & What The Fed Thinks About Them

Rather than any labor market or inflation news, the most important developments relate to trade and fiscal policy developments. Chief among these is the mutual temporary rollback in tariffs between the US and China. The détente substantially reduced the near-term risk of recession and demonstrated that the Administration is less hard-line on tariffs than initially feared.

Amidst this continued uncertainty and the lack of clarity on how either trade or fiscal policies will affect the economy (and the lack of clarity on what policies will eventually be adopted—there is another round of China talks the week before the meeting), the Fed’s message is the same unchanged: they want to wait for more data, their most important priority is to keep long-term inflation expectations anchored, and the resilience of the labor market makes them confident that they can continue waiting.

Schmid: "While theory might suggest that monetary policy should look through a one-time increase in prices, I would be uncomfortable staking the Fed’s reputation and credibility on theory."

Bostic: "I continue to believe the best approach for monetary policy is patience. As the economy remains broadly healthy, we have space to wait and see how the heightened uncertainty affects employment and prices. So, I am in no hurry to adjust our policy stance."

Hammack: “I legitimately do not know which way this is going to break”

Jefferson: “I believe it’s important that monetary policy make sure that any increase in the price level is not converted into a sustained increase in inflation"

Their desire to stay put on rates is only bolstered by the recent labor market data. The headline jobs data portrays a strong labor market, with initial readings of 177,000 and 139,000 jobs added in April and May, and unemployment still at 4.2%. But underneath the surface, the outlook for the labor market isn’t as bright. Unemployment moved sideways, but employment and participation fell. May’s payroll print came with significant negative revisions to preceding months, and the composition of job growth is narrow and vulnerable to incoming shocks. Nevertheless, the labor market data so far has made FOMC members more confident in the strength of the labor market.

Kashkari: "Personally, I find these arguments [focusing on fighting inflation] more compelling given the paramount importance I place on defending long-run inflation expectations."

Daly: "The net net is businesses are still waiting to see, and as they wait to see, we wait to see, because we have policy in a good place for the economy we have"

Kugler: "the labor market appears resilient and stable and economic activity is continuing to grow, although at a more moderate pace than in the second half of last year."

Collins: "My modal outlook, I’ll call it as opposed to a baseline, does not have a significant downturn."

Meanwhile, we’ve received favorable inflation news for April, although May is less impressive. Relative to what the Fed was seeing going into the May FOMC meeting, inflation readings have declined significantly, partly due to the drawdown in equity prices. None of this will be comforting to the Fed, which sees the tariff effects on prices coming later this month. We also think the incoming inflation data will be challenging, due to incoming price spikes in electricity and natural gas.

Goolsbee: “I would say surprisingly little direct impact [of tariffs] so far in the data that’s coming out... We don’t know if that will remain true for the next month or two.”

Barr: "I expect tariffs to lead to higher inflation in the United States and lower growth both in the United States and abroad starting later this year."

Waller: "Whatever the size of the tariffs, I expect the effects on inflation to be temporary, and most apparent in the second half of 2025."

Bostic: "In my SEP I have one cut only for this year, because I think this is going to take longer to resolve"

Harker: "Disinflation has proceeded only slowly, and that in itself has been reason enough to hold steady"

Williams: Policymakers should aim to anchor "the whole curve" of inflation expectations, not just long-term.

What We’re thinking

FOMC members will be encouraged to stay put by the recent labor market data, but this raises the risk of policy complacency going forward. The labor market looks fine on the surface, but the trajectory is concerning. There are a lot of stories you can tell about why the labor market will crack, but few reasons to believe it will pick up or continue to move sideways if the current policy trajectory continues. Even if they’re unwilling to cut soon, they need to show that they’re cognizant of these risks and willing to move quickly if we see more worrying signals in the labor market data.

The continuing challenge of conducting monetary policy amidst supply shocks, labor market risks, and elevated inflation demonstrates the deficiencies in the Fed’s framework. We continue to advocate for the use of nominal aggregates, such as nominal consumer spending and labor income, as an effective method of avoiding the pitfalls of trying to slice-and-dice inflation and overtightening in response to supply shocks.

How Has The Data Evolved Since Last FOMC?