Published on: June 19, 2025
The US Federal Reserve (Fed) announced that it is keeping its key interest rate unchanged, in line with market expectations. Despite constant downward pressure from the Trump administration, the Fed is being cautious by maintaining its rate in the 4.25% to 4.50% range since December.
In a press release, the central bank emphasized that “uncertainty about the economic outlook has decreased but remains high.” While highlighting the low unemployment rate, policymakers say they are considering two rate cuts this year. It should be noted that the market is increasingly skeptical about this possibility, given the concerns expressed by the bank about inflation.
Along with this decision, the Fed updated its economic projections as follows.
Inflation should remain high at 2.4% until 2026, before easing to 2.1% in 2027, against a backdrop of generally stable unemployment. Policymakers also point to a stagnating environment, with economic growth slowing to 1.4% this year. Unemployment is set to rise to 4.5% by the end of 2025, and inflation could close the year at 3%, well above the Fed’s target.
Furthermore, policymakers now anticipate gross domestic product (GDP) growth of 1.4% at year-end (versus 1.7% forecast in March and 2.1% in December 2024).
Points of divergence
The Fed continues to assert that US labour market conditions remain solid, but this is not quite the case. Although employment and wages are up, supporting consumption, the latest employment reports clearly show a deterioration in US labour market conditions due to insufficient demand for labour in many sectors.
The bank’s scenario also differs from our analysis regarding inflation trends. Specifically, we need to consider who absorbs the tariffs and how long it takes for them to be passed on to consumer prices. During the Q&A session, Chair Powell emphasized that someone has to pay the tariffs. While this is true, it’s unlikely to be fully reflected in US prices.
The Fed had the opportunity to tell us more today, but it revealed next to nothing. The central bank seems to be downplaying the recent deterioration in the US labour market and ignoring the fact that recent inflation data are better than expected. It appears that this dynamic of expected inflation backloading is driven more by assumption than economic analysis.
Three months ago, Chair Powell stated that the Fed does not guess or assume. If that is the case, perhaps we should see an analysis of foreign and US margins and the impact of exchange rates instead of fearing a hypothetical scenario in which businesses absorb 0% of tariff impacts and households absorb 100%. Today’s analysis said nothing about these crucial dynamics.