Monetary Policy & Communication
- Key Interest Rate Maintained
The Committee unanimously decided to maintain the target federal funds rate at the range of 4.25%–4.50%. This stance is considered “moderate” or “somewhat restrictive.” - Balance Sheet Reduction Continues
The reduction of holdings in Treasury securities and mortgage-backed securities (MBS) remains in progress. - Risk Communication
Participants discussed ways to improve public communication regarding economic uncertainty and risks, including possible revisions to the Summary of Economic Projections (SEP) and the use of alternative scenarios. Further discussions will take place after the review of the long-term policy statement is finalized (expected by late summer).
Forward Guidance
- Majority of Participants noted that some rate cuts this year may be appropriate, considering the transitory inflationary effects of tariffs, anchored long-term inflation expectations, and the potential for a slowdown in economic activity.
- Some Participants expressed openness to cutting rates at the next meeting (July), depending on incoming data.
- Others argued that no rate cuts would be necessary in 2025, given that inflation remains above target and inflation risks are still elevated.
- Market Operations: The New York Fed will add a morning Standing Repo Facility (SRF) operation starting June 26 to enhance policy transmission.
Current Economic Conditions
- Inflation: Still elevated (headline PCE at 2.3%, core at 2.6% YoY as of May), though improving. Short-term inflation expectations remain high, while long-term expectations are stable.
- Labor Market: Still tight, with unemployment at 4.2% and moderate wage growth of 3.9% YoY. Payroll gains remain solid.
- Economic Growth: Economic activity grew robustly in Q2 2025, driven by household consumption and business investment, although some signs of weakness emerged in manufacturing.
- International Trade: Highly volatile due to tariffs. U.S. imports declined sharply in April following a Q1 surge, while exports increased. The U.S.–China tariff reduction deal spurred a rebound in late-period trade.
Staff Forecasts and Risk Assessment
- GDP Growth 2025–2027 was revised upward due to lower assumed tariffs.
- Inflation Outlook: Expected to decline to 2% by 2027, though tariff-related inflation pressure may persist through 2025 and slightly into 2026.
- Unemployment: Expected to rise gradually next year and remain slightly above the natural rate through 2027.
- Risks & Uncertainty:
Still elevated, especially around trade, fiscal, and immigration policy. Downside risks to GDP and labor markets are lower, but inflation risks remain skewed to the upside.
Participants’ Views
- Uncertainty: Has declined since April (mainly tariff-related), but overall remains elevated.
- Risks: Concerns over labor market and growth persist. Some emphasize inflation risk; others highlight labor market uncertainty.
- Tariffs & Inflation: Acknowledged that tariffs raise prices, but effects and duration remain unclear.
- Tariff pass-through to consumers varies depending on market conditions and business characteristics.
- Concern exists that tariffs could heighten inflation and unanchor long-term expectations.
- Labor Market: Considered close to full employment, but companies are cautious about hiring.
- Households & Businesses: Consumption remains solid, though signs of slowing are apparent, especially among middle-income groups. Consumer and business sentiment remains low.
Financial Market Developments
- Interest Rates & Market Expectations: Treasury yields rose, and expectations for rate hikes increased, reversing declines triggered by the April tariff announcement.
- Risk Assets: Equities rallied, credit spreads narrowed, and the VIX fell—reflecting improved sentiment as trade tensions eased.
- Exchange Rate: The U.S. dollar weakened, consistent with revised U.S. growth prospects relative to major economies.
- Funding Markets: Remain stable. Reverse Repo usage remains high. Reserves (~$3.5 trillion) are ample but expected to decline as the debt ceiling lifts and the Treasury General Account is replenished.
- SOMA Portfolio: Balance sheet runoff continues, projected to end by February 2026 with a balance of ~$6.2 trillion (20% of U.S. GDP).
Key Takeaways
- The FOMC maintained the federal funds rate at 4.25%–4.50% and continued balance sheet reduction.
- Inflation remains above target but is easing. The labor market is still tight.
- Economic activity is solid, though signs of softness and elevated uncertainty—especially regarding tariffs and trade policy—persist.
- Most participants support limited rate cuts in 2025, but views vary.
- The Committee reaffirmed its data-dependent, cautious approach and its commitment to restoring inflation to the 2% target.