Rates Stay Unchanged as Fed’s Search for Clarity Continues

Key Takeaways

Despite a steady slowdown in the inflation rate, the Federal Reserve (Fed) left the target short-term lending rate unchanged at its fourth straight meeting on June 18. The U.S. short-term rate target held steady in a range of 4.25% to 4.5%, bucking the trend in other developed markets. The rate remains at a 17-year high, as Figure 1 illustrates.

Rate Cuts Remain an Option as Growth Forecast Slows

“Uncertainty about the economic outlook has diminished but remains elevated,” Fed Board Chair Jerome Powell said in his post-meeting news conference. He further noted that Fed officials need to “learn more” about trade, fiscal and regulatory policies before making interest rate adjustments. However, most policymakers still expect to cut rates later in the year.

The rate-cut expectations likely stem from two components of the Fed’s latest economic projections. Policymakers now expect gross domestic product (GDP) growth to slow to 1.4% by year-end, down from the Fed’s March forecast of 1.7%. They also project the unemployment rate, which was 4.2% in May, to climb to 4.5% by December.

Meanwhile, Fed officials expect inflation to reignite as the year progresses, largely due to tariff policies. “We expect a meaningful amount of inflation to arrive in the coming months,” Powell said. He also noted that he expects to gather more clarity about tariffs and their effects on consumer prices throughout the summer.

“We will make smarter and better decisions if we wait,” Powell said.

He and his colleagues forecast the annual core personal consumption expenditures (PCE) index, which slowed to 2.5% in April, to climb to 3.1% by year-end. In March, policymakers expected a year-end core inflation rate of 2.8%.

If these projections materialize, Fed officials could face a complicated situation. Do they cut rates to aid a slowing economy and weakening labor market, or do they hold interest rates steady to combat rising prices?

Powell Defends Fed’s Wait-and-See Strategy

Despite the lingering threats to growth, inflation and employment, Powell continued to characterize the economy as “solid.” He stressed that the Fed is in no hurry to adjust monetary policy, which he described as “in a good place” and “modestly restrictive.” He also emphasized that the Fed is well-positioned to respond to incoming data and any need for interest rate adjustments.

Will Inflation Eventually Slow Enough for the Fed to Act?

After moderating for four consecutive months, the annual headline Consumer Price Index (CPI) increased slightly from 2.3% in April to 2.4% in May. Core CPI (which excludes food and energy prices) held steady at 2.8% for the third straight month. Meanwhile, consumer inflation expectations eased amid waning fears about tariffs.

We still believe inflation will continue to moderate slowly. Of course, tariffs may create bumps in the road, but we expect them to smooth out over time. We believe concerns about the slowing economy will outweigh temporary pricing pressures, prompting the Fed to resume its rate-cut program later this year.

Uncertainties Put Diversification, Opportunity in Spotlight

We believe broad portfolio diversification is appropriate for all market climates, but it may be particularly prudent during periods of heightened uncertainty and volatility. As we’ve seen recently, staying diversified can help temper near-term swings in asset class performance. What’s more, volatility often leads to market dislocations, which can highlight value and opportunity across asset classes.

Over time, volatility will likely ease as the economy and financial markets adjust to new trade agreements and other aspects of President Donald Trump’s agenda. Until then, staying diversified across high-quality stocks to capture upside potential and high-quality bonds to foster risk management may help manage market fluctuations.