The Federal Reserve held rates steady today, while also projecting slow economic growth, higher unemployment, and higher inflation. And while the Fed signaled that two further rate cuts are still their base-case for the remainder of 2025, the timing of those cuts remains up in the air.

Starting with the survey of economic projections, the Fed’s view on the remainder of 2025 has weakened since the latest forecasts in March.  “Real” – inflation adjusted – growth for 2025 has been downgraded to 1.4% from the 1.7% anticipated back in March, while growth expectations for 2026 were reduced to 1.6% from 1.8%.  Other estimates moved higher, but not in the categories you would hope. Consistent with slower economic growth, the unemployment rate (currently at 4.2%) is now expected to rise to 4.5% by year-end and remain there through 2026, while prior forecasts anticipated the unemployment rate to hit 4.4% this year before declining next year.  Inflation expectations for this year likewise rose to 3.0% for PCE prices (the Fed’s preferred inflation metric) from a prior estimate of 2.7%, while next year is now anticipated at 2.4% versus a prior estimate of 2.2%.

With slower expected growth, and higher unemployment, the Fed continues to anticipate that two rate cuts will be appropriate before year-end, but tariff inflation concerns now have them anticipating that rate cuts will progress at a slower pace over the following two years. We believe that the Fed’s concern over higher and more persistent inflation related to tariffs is misguided.  Yes, tariffs can raise prices for the tariffed items, but they leave less money left over for other goods and services. They shuffle the deckchairs on the inflation ship, but don’t change how high or low the ship sits in the water.  That’s up to the money supply, which is barely higher today than it was in April 2022.  We believe this relative monetary tightness is why inflation has slowed recently, with CPI up at a 1.0% annualized rate in the last three months.    

Changes in today’s Fed statement were less dramatic.  Today’s statement included text that previously noted the unemployment rate had “stabilized at low levels” now simply stating that the unemployment rate “remains low.”  Meanwhile text around the level of uncertainty in the outlook softened to say uncertainty has “diminished but remains elevated”.  Along with that change, the Fed removed previous language that “risks of higher unemployment and higher inflation have risen.”  A bit odd, considering that they raised inflation and unemployment rate forecasts at the same time. 

The press conference brought little new information, with Powell reiterating that the economic environment justifies a continued pause while we wait and see the impacts from changes out of Washington.  Powell waived off concerns surrounding Middle East conflict and the threat of higher oil prices, but did acknowledge that the global landscapes are changing as immigration, trade, and geopolitics are in the spotlight. This – he rightly states – is the purview of Congress, not the Fed, but real change is happening in the world around us. 

We admit this is an incredibly difficult time to forecast, with soft sentiment data moving in a negative direction alongside weakness in some hard data such as housing, while many other measures of activity continue to progress.  How the economy will progress in the short term if true progress is made in cutting deficit spending and signing new trade deals is still to be seen. The era of easy everything is over, and while that may not be a welcome transition for many, it’s a necessary transition. 

Much could happen between now and the next Fed announcement scheduled for July 30th.  There will be two more readings on PCE inflation, another employment report, potential progress on the tax bill, and a whole lot of tweets. Throughout this period of increased uncertainty, we are working harder than ever to dive into the data and identify the trends that we believe are critical to navigating the current environment. From the Monday Morning Outlook, Three on Thursday, Data Watches, and Wesbury 101 videos, our goal is to help bring you clarity on the numbers that matter most.

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Deputy Chief Economist

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