Federal Reserve Monetary Policy Decision

Monetary Policy Decision Monetary Policy

Source: Federal Reserve
Source Link: https://www.federalreserve.gov/
Frequency: 8-times a year
Next Release(s): September 17th, 2025 2:00 PM

Latest Updates

The Federal Reserve opted to hold interest rates steady at the July FOMC meeting, extending the current pause streak to five meetings as policymakers continue to wrestle with an uncertain inflation outlook. While the decision itself was widely expected, the appearance of two dissents in favor of a cut, something not seen since 1993, added a dose of political intrigue and signaled growing pressure on the Fed to act. Still, Powell and the majority held firm, citing resilient labor market data, stickier inflation, and rising goods prices linked to tariffs as reasons to stay on hold. The message from the Fed remains one of cautious patience: data will guide the next move, not speculation.

Decision

At the conclusion of the July 2025 FOMC meeting, the members voted to keep the target rate of the Federal Funds rate at 4.25% to 4.50%. The move was largely expected as there has not been a major shifts in the attitudes of the voting FOMC members (even though there has been a lot of pressure from the White House). We continue to wait for the first rate cut of 2025 after the 100 bps of easing that ended the previous year. Since the Fed’s policy stance did not move much, its press release was more or less unchanged.

The biggest news in the mostly benign Fed decision is the fact that two FOMC voters dissented in today’s vote. This has not happened since 1993. Voting against a pause, in favor of a 25 bps cut, were FOMC members Christopher Waller and Michelle Bowman. Their dissents are not too surprising since both came out after the June meeting to voice their support for a rate cut as soon as July (this week’s) meeting. It has been suggested that these two members are increasingly trying to align with the Trump administration’s desires to cut interest rates to potentially become candidates for the position as Chair of the FOMC if it becomes vacant in the near future. Their dissents would certainly be looked favorably upon by the President.

The bottom line is that the Fed still lacks clarity on inflation, which has kept it from cutting interest rates for the past three meetings. From January to May, core inflation had been easing in a clear short-term disinflationary trend, with the three-month annualized change in core CPI falling to 1.7% in May, the lowest since July 2024, just ahead of the Fed’s 50 bps cut in September. But the June data marked a reversal, reinforcing the Fed’s wait-and-see approach. Notably, goods inflation picked up, with some attributing it to the early effects of tariffs feeding through to consumer prices. That shift largely undercut any dovish interpretations of lagging price data and keeps the Fed squarely focused on the tariff-driven inflation outlook.

Since the June meeting, the trade outlook remains murky. The August 1st deadline for implementing additional tariffs has not been delayed, raising questions about whether the Fed can (or should) assume further postponements from the administration. While few new deals have been finalized, the ones that have suggest a baseline 15% tariff level under Trump’s current approach. That may give the Fed some footing for forecasting, but the broader uncertainty around timing, coverage, and enforcement still limits visibility and complicates the inflation outlook.

Press Conference

Opening Statement

Powell’s opening statement in the post-meeting press conference was also pretty similar to the thoughts given in the last three press conferences:
- “Economic activity has moderated” - Second quarter GDP growth was released earlier today, giving the FOMC a quick look at the most recent reading of economic growth. The headline growth rate of 3.0% was impacted by a sharp decline in imports and inventories, continuing the trend from Q1. Excluding these components, GDP was up just at an 1.1% SAAR in Q2, slowing from 1.5% in Q1. Powell specifically points out that, “GDP rose at a 1.2% pace in the first half of this year, down from 2.5% last year,” looking at the average of Q1 and Q2. Weakening GDP growth is worth noting, but it ultimately doesn’t directly factor into the Fed’s decision making.
- “In the labor market, conditions have remained solid” - Powell continues to highlight that the labor market is not flashing any warnings signs as he has in the last three meetings. He specifically notes that conditions are “consistent with maximum employment.” Notably, the unemployment rate hovers around 4.1%, and job creation is still averaging just above 100,000. A trend of rising jobless claims has, in recent weeks, given way to lower claims numbers recently. Overall, there is not much data out there that suggests the Fed should be worried about the employment mandate.
- “Inflation has eased… but remains somewhat elevated relative to our 2% longer run goal” - Powell notes that inflation is elevated compared to the Fed’s goal, keeping it as the main focus for policymakers. He points out that while services inflation has eased, “increased tariffs are pushing up prices in some categories of goods.” This likely refers to this month’s June CPI update. Powell also makes a quick note of a rise in short-term inflation expectations which is attributed to tariff news.
- “We see our current policy stance as appropriate to guard against inflation risks” - Powell roots the Fed’s patient approach to rates in its desire to dampen the upside risk in inflation. With tariffs beginning to feed into goods prices and near-term inflation expectations drifting higher, the Fed is focused on preventing what Powell called a one-time price increase from evolving into a more persistent inflation problem. He stressed the importance of keeping long-term expectations anchored and made clear that the Committee remains data-dependent as it gauges whether recent price pressures are transitory or something more entrenched.
Q&A

Here are some interesting questions and responses in the question and answer portion of the press conference:
- Is a September rate cut expectation unrealistic at this point? - Given current data, Powell says that the FOMC does not think that “restrictive policy is holding it back inappropriately and modestly restrictive policy seems appropriate.” In a follow up question, Powell does say that the data coming between now and September could cause that position to change.
- You removed that “uncertainty has diminished” in this months statement. Has uncertainty increased? - Overall, it seems that uncertainty has not changed much since the last meeting. Powell: **“**At the time of the last meeting, uncertainty had been moved down a little bit but it was more or less even this time so we took out had diminished because it didn't diminished further so not much in that.”
- When asked about the two dissenters, Powell did not speak on specifics. Instead, he highlighted that the two who disagreed had “clear explanations of their thinking” and that overall, “it was a good meeting around the table.” Not much to say about any potential fractures in the FOMC.
- On the policy being ‘modestly restrictive,’ does that mean there’s not much scope to reduce rates…? - Interestingly, in his answer to this question Powell noted that his own estimate is that rates are “modestly restrictive” and there are a range of views on rates from “neutral” to “more restrictive (than modestly restrictive).” This suggests no FOMC members see rates as “accommodative” at the current level.
- What have you learned about the tariffs passing though into prices and causing inflation? - Powell first says that the current data is “quite early days” but suggests that the evidence points to “companies or retailers… institutions that are upstream from the consumer are paying most of this for now.” However, the Fed expects to see more of what the June data showed, tariffs pushing through to consumer prices. Powell also said that survey data suggests firms plan on increasing prices. He finishes by saying the process “will probably be slower than expected at the beginning,” likely because firms built inventories ahead of tariffs.
- Do you have concerns about rates impacting interest rate charges? - This is related to Trump’s calls for rate cuts so that his administration can refinance the debt at lower rates. Powell: “We don't consider the fiscal needs of the federal government… It's just not something we take into consideration.”
- What kind of data does the Fed need to see before you’re ready to cut? - Powell, in my opinion, gives an interesting answer. He does not suggest that the Fed needs to see lower inflation data or weaker labor market data, explicitly. Instead, he says that if “the risks to the two goals were moving into balance” that this would imply policy should move to a more neutral stance. Because most FOMC members see rates as at least “modestly restrictive,” policymakers just need to be reassured that upside inflation risks have diminished before cutting. They don’t necessarily need to see inflation data move down.
Source
The Federal Reserve left its target range for the federal funds rate unchanged at 4.25% to 4.50% for the fourth meeting in a row. The non-event was largely expected, as futures markets more or less had priced in the move for the last two to three weeks. However, the Fed’s “wait and see” position in the face of cooling inflation data made this pause look hawkish, and the market responded in kind.

Fed Statement

The Federal Reserve’s press release following the June meeting was left mostly the same as the last meeting in May. Only two minor changes were made:
- In the first paragraph, the description of the unemployment rate was simplified, and the underlying meaning remains the same. The Fed still assesses the labor market as strong, and the recent readings of the unemployment rate are low.
- In the second paragraph, the statement is adjusted to reflect an easing in the Fed’s uncertainty about the economic outlook. The FOMC is likely referring to some new clarity on trade policy, which has become less chaotic in the last two months with trade deals and pauses becoming the focus, and the worst of the China-US trade relationship likely behind us.
Overall, the official statement still communicates a “wait and see” position while policymakers attempt to look through uncertainty. This position is accompanied by the general assessment that the economy is in solid standing, even though Q1 GDP growth came in negative.

Summary of Economic Projections

The conclusion of the June FOMC meeting comes with an update of the central bank’s economic projections that were last updated in March. Since then, we have had the “Liberation Day” tariff announcement and the aftermath, including the attempts to make trade deals with China and the UK. The Fed should have been able to produce projections with more confidence than three months ago. Here are the details of the projections:
- FOMC members have become more bearish on growth in the next two years, with the median projection of GDP growth in 2025 moving down -0.3 ppts to 1.4% and in 2026 moving down -0.2 ppts to 1.6%. The range of forecasted 2025 values fell from 1.4 ppts in March to 1.0 ppts in June. The general message is that the Fed has become more confident that growth will slow down and expects a stronger slowdown over the next two years than three months ago.
- The projections for the unemployment rate look similar to the GDP projections. Across all three years, the median projections in June increased compared to the March projections, with the forecast holding at 4.5% in both 2025 and 2026. The range of values for those two years also shrank, sending the same message that FOMC members are more confident that the labor market will loosen and expect more loosening in labor markets over the next two years than three months ago.
- The most surprising shift in the projections came in the PCE and core PCE forecast. FOMC members upgraded their forecasted values significantly for the next two years, with the median core PCE projection rising to 3.1% in 2025 and 2.8% in 2026, both upward revisions of 0.3 ppts. Unlike the GDP and unemployment rate ranges, the range of values for expected inflation remains about as wide in June as it was in March. But when looking at the spread of values in the center (excluding the three largest and three smallest), the range actually got wider. These changes suggest to me that the inflation outlook is still being clouded by uncertainty, but the Fed does still want to insist that it sees tariffs as inflationary.
- One more interesting thing to note on the inflation outlook is a shift in the risk assessment that didn’t align with the revisions to the projections. The right bar chart shows that 4 FOMC members shifted their view of risks to the inflation outlook from “weighted to upside” to “broadly balanced.” This detail is further evidence that there is a growing split in the inflation assessment that should be watched closely.
Overall, the economic projections pointed to weaker growth, a weaker labor market, but higher prices, a dynamic situation that suggests the Fed will have to find a delicate balance between its employment and inflation mandates. The balance in the forecast shift has caused the median projection for the federal funds rate target level to be unchanged for 2025 and shifted up slightly for 2026, from 3.375% to 3.625%. However, that balance comes as a result of an even split among policymakers. For 2025, there are nine FOMC participants who see 0-1 quarter-point cuts, and there are ten FOMC participants who see 2-3 quarter-point cuts. These dynamics make it hard to decipher any kind of policy rate path, and, in the end, maintain a similar level of uncertainty than was seen in the March projections.

In my opinion, these projections lean hawkish since they appear to disregard the progress in inflation that we have seen in the last few months despite tariffs. Near-term inflationary pressures have renewed the disinflationary trend that was lost in the first quarter (a main reason why the Fed turned more hawkish), and that doesn’t seem to have resonated with the Fed, or at least (roughly) half of the Fed that sees no rate cuts this year and core PCE inflation jumping back above 3%.

In terms of the outlook, I believe the Fed feels too secure about the labor market and economic activity as sources of strength in the demand side of pricing pressures. Just look at recent retail sales data (-0.9% MoM in May, below expectations) and rising continued claims data (highest since November 2021), and the cracks are showing. For these reasons, I see the June round of projections as more hawkish than expected, which should put upward pressure on short-term interest rates.

Fed Chair Powell Press Conference

In the post-meeting press conference, Chair Powell’s opening statement sought to reinforce the Fed’s “wait and see” position. The two main points underpinning the patience on policy changes were ones that we have heard before:
- Powell reasserts that the labor market remains solid and does not require any extra attention at this point, saying, “Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance and consistent with maximum employment.” This employment assessment has been the same in each 2025 meeting so far and is a key assumption in the “wait and see” position.
- Inflation has come down as seen in recent data, but Powell redirects from that to point out that tariffs complicate the future path of inflation. Because tariff effects are uncertain and perceived to be weighted to the upside (“Increases in tariffs this year are likely to push up prices… the effects could be short-lived or more persistent”), the motivation for a cut is dismissed.
At the end of the opening statement, we get a quote we’ve heard before, summing it all up.

“We are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments.”

Powell was challenged on this position in the question-and-answer portion of the press conference. Multiple reporters pressed him on why the Fed chose not to cut rates in June despite cooling inflation, signs of economic softness, and consumer strain. Powell emphasized that while inflation has improved, the full impact of recently imposed tariffs remains unclear and is expected to show up over the coming months.

“Without tariffs, that confidence [in falling inflation] would be building… but we have to learn more.”

He reiterated that monetary policy must be forward-looking and cautioned against premature easing, noting that the Fed needs more data to understand whether the tariff-driven price increases will be temporary or more persistent. Despite acknowledging that inflation could remain contained, Powell reiterated that the Fed is “well-positioned to wait and learn,” underscoring the high degree of uncertainty and the need to avoid misreading a potentially transitory inflation bump as something more entrenched.
Source
The Federal Reserve kept rates unchanged for the third consecutive meeting today as it continues to avoid rate cuts and assess the developing economic impacts of the newly implemented and threatened tariffs. The key difference between this month’s meeting and the March meeting is several new data points to contend with, including a negative Q1 GDP print.

Statement

The Federal Reserve kept the target rate of the Fed Funds rate unchanged at 4.25% to 4.50% in the announcement today. This is the third straight pause since the last rate cut in December. The FOMC also made no changes to its quantitative tightening (QT) measures, which were updated in the previous announcement in mid-March. The actions were agreed upon unanimously, which is a slight difference from the last meeting when FOMC Governor Christopher Waller voted against easing up on QT.

Aside from these differences, there were no major changes to the statement, just minor changes that provided some nuance to the typical assessments in the press release.
- The change at the beginning of the release is an attempt to address the negative Q1 2025 GDP growth print, which was heavily impacted by trade dynamics. The FOMC members want to make it clear that it is looking through the recent surge in imports to other indicators that showed the economy was still growing like the real final sales to private domestic purchasers aggregate (sum of consumer spending and gross private fixed investment) which grew at a SAAR of 3.0%, slightly above the Q4 2024 2.9% gain. Powell actually points to this data point in his opening remarks of the press conference.
- The minor adjustments made to the second paragraph highlight the increasingly uncertain outlook that consumers and businesses are facing due to Trump’s new trade policy. It seems that now the FOMC members are making it clear that they see upside risks to unemployment and inflation, which were first communicated in the March SEP materials.
Overall, the statement was largely in line with prior communications, but it carried a more cautious tone reflecting the FOMC's growing awareness of a softening outlook. While hard data, such as labor market conditions and economic activity, continue to appear "solid," the Fed acknowledged more uncertainty stemming from soft indicators like consumer sentiment and regional Fed surveys. These subtle shifts suggest the Committee is more attuned to downside risks, even as headline figures remain resilient. At the same time, the Fed’s outlook for inflation has also firmed up as it sees tariffs forcing companies to increase selling prices.

Press Conference

The FOMC press conference continued with the theme of a weaker economic outlook and unique upside inflation risks from tariffs. Powell acknowledged downside risks have risen, especially from trade policy, but emphasized they have not yet materialized in official data. He pointed out particularly that soft data continued to deteriorate while hard data had remained solid. Overall, the outlook is still uncertain, and the FOMC could not make assumptions about the timing and magnitude of the effects of tariffs on the outlook.

Regarding inflation, the Fed still sees inflation as above target, but Powell noted that it had eased significantly since mid-2022. While inflation has fallen, short-term inflation expectations have started to rise in response to tariff policy changes, but the FOMC still sees long-term inflation expectations as anchored. The Fed has not determined whether it sees tariffs as a temporary driver of pricing or if it will become a more persistent problem. Despite early inflation signals, FOMC members have opted to keep policy as it is until more is known about how trade policy plays out.

While Powell made sure to highlight the uncertainty in the inflation outlook, one quote during the Q&A session sticks out: “the underlying inflation picture is good.” In my view, the Fed’s focus is a bit more on the growth and unemployment side of the mandate as opposed to the inflation side. Yes, tariffs are likely to be a supply shock that drives prices higher, but the deflationary pressures from a much softer consumer are a bit overlooked. I believe that firms will struggle to successfully pass through most of the tariff costs and that the Fed is tuned into this downside risk.

On the policy outlook, Powell made clear that the Committee is not currently committing to rate cuts and is comfortable maintaining the current stance for now. While the March Summary of Economic Projections included two cuts penciled in for 2025, Powell acknowledged that recent developments, particularly around trade policy, have introduced enough uncertainty to potentially change that path. Indeed, the Fed continues to be caught out by Trump’s policy announcements:

He emphasized that the Fed's policy rate is “moderately restrictive” and well-positioned to respond flexibly as more data comes in. Any shift in policy, whether a cut or an extended hold, will be determined by how the balance of risks evolves, and not made in anticipation of future developments. Indeed, Powell stuck with his favorite phrasing of this dynamic throughout the Q&A session: “We don’t have to be in a hurry [to cut].” Funnily enough, this is one of Trump’s main criticisms, calling him “Mr. Too Late” in a Truth Social post a few weeks ago.

On the topic of President Trump and the new administration, Powell was asked about the escalation in political pressure and criticism in the last few months. Once again, the Fed Chairman reaffirmed that Fed decisions are not influenced by political pressure. In fact, his position seemed firmer than ever. In response to a question about whether Powell had “asked for a meeting” with President Trump, he responded bluntly:

If Chair Powell did anything in the press conference, he reassured the markets that as long as he is leading the Fed, there will be no political interjections into monetary policy.
Source
In the second meeting of 2025, the Federal Reserve kept the target range of the Fed Funds rate at 4.25% to 4.50% meeting expectations that the US monetary authority would remain in a wait and see mode. While rate policy was unchanged, the Fed did decide to make some adjustments to its quantitative tightening (QT) policies in order to ease financial conditions in a particularly volatile period for financial markets.

Statement

In its main statement, the Federal Reserve indicated its intention keep rates the same as it tries to look through the new rise in uncertainty that has come in the Trump administration’s first two months in power. There were not many changes to the press release’s assessment of the economic situation. The Fed still sees economic activity expanding at a “solid pace” and “solid” labor market conditions while inflation is described as “somewhat elevated.”

The first change came in the second paragraph as the FOMC decided to communicate its sense that uncertainty was clouding the outlook. It removed the sentence “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance,” and updated the next sentence to point out that “uncertainty around the economic outlook has increased.” Essentially, if the Fed had any kind of clarity on the inflation and employment situation in January, it no longer has that due to the seismic shifts in government policy.

This frames the March pause in a very different way than the January pause. The January pause was a break from cuts to let inflation data confirm a downtrend. The pause today is done out of a necessity to reassess the economic outlook in the face of the new reality of widespread tariffs and the potential for a large decline in government spending. Going into the new year, it felt like the Fed was only looking to move rates in one direction in 2025, but now it seems like all directions are in play.

The second and third changes in the statement are related to the shift in quantitative tightening that had been suggested by some analysts as a possible policy adjustment in the face of financial market turbulence. Indeed, the FOMC opted to reduce the pace of quantitative tightening by reducing the drawdown of Treasury securities on its balance sheet from $25 billion a month to just $5 billion a month. The final change relates to Governor Waller voting against this new pace of balance sheet run off but not voting against the pause on rates. A reduction in quantitative tightening should allow for some easing in financial conditions to improve liquidity during volatility.

Summary of Economic Projections

This FOMC meeting was accompanied by an update in its Summary of Economic Projections (SEP) which was last adjusted in its December FOMC meeting that preceded the inauguration of President Trump. Thus, this first attempt by members to try and digest how the economy changes under new leadership.
- The projections with the most changes were in GDP growth over the next three years. The median projection was revised down in each of those three years with the largest downward revision being the -0.4 ppts downgrade to 2.1% for 2025. The change in the 2025 median came from 12 members abandoning their projections of 2% or higher growth this year with just one member at 2.4% to 2.5%. The downgrade was accompanied by a major shift upward in uncertainty and risk assessment that is now heavily weighted to the downside.
- FOMC members appear to be confident that the labor market will remain strong as it mostly confirms its forecasts for the unemployment rate. The only change was a minor upward revision of 0.1 ppts in the median projection of the 2025 unemployment rate. However, FOMC members agreed broadly that the risks to unemployment were weighted to the upside and shrouded in uncertainty.
- The updated inflation projections likely do include some thoughts on how tariffs will flow through to prices as that is one of the early Trump policies that has been put in place. FOMC members project a pick up in inflation this year with the median PCE inflation forecast up 0.2 ppts to 2.7% and the median core PCE inflation forecast up 0.3 ppts in 2025. This suggests that the initial assessment of the impact of tariffs on inflation is that the increase could be transitory or that weaker growth could offset the potential for higher inflation. Like other projections, there was an increase in uncertainty and a strong weight placed on upside risks.
- Through it all, the median projections for the Fed Funds rate were kept the same from December to March. The 2025 distribution was basically unchanged with most FOMC members looking for 1-2 cuts this year. The 2026 distribution shifted a lot with some members moving towards the extremes while most landed on the target range of 3.25% to 3.50% which would be about 100 bps of cuts in two years. With the inflation forecast revised up and the general consensus being that tariffs will be inflationary, an unchanged policy path projection looks dovish.
Press Conference

In the post-FOMC meeting press conference, Chair Powell remained set on communicating that the Fed is in a wait-and-see mode as it wants to gain clarity on the economic outlook. He was not shy in pointing out that trade policy had been a major source of uncertainty. Powell made several references to “separating the signal from the noise” in distilling the impacts of new policies.

Additionally, he wanted to make the case that the Fed did not have to be in a hurry to change policy and that the economy was in a good state and could handle the current level of interest rates. The quote that sticks out was near the end of Powell’s opening remarks: “We do not need to be to be in a hurry to adjust our policy rates and we are in great position to wait for clarity.”

In the question and answer session, Powell was pressed on his and other members’ assessment of how tariffs had been factored into the economic outlook, especially the inflation outlook. He was questioned on the shift in core PCE inflation projections (2025 up, no change in 2026 and 2027 forecasts) meant that the Fed sees tariffs as a “transitory” inflationary pressure. His answer was the following

“I think that's the base case. But as I said we really can't know that. We are going to have to see how things actually work out. And the fact that there wasn't much change, I think that's partly because you see weaker growth but higher inflation.”

So it does seem like the Fed wants to look through the tariff inflation impulse as a temporary force. or at the very least, it sees the drag on growth offsetting the upward pressure on prices. Again, uncertainty is high, so it is hard to distill meaning from this, as it’s possible that FOMC members still believe that Trump is bluffing with tariffs. This appeared to be a key message for markets that made equities and rates react dovishly.

There were also several questions about inflation expectations, and whether or not the recent data in surveys (specifically the UMich consumer sentiment survey) was evidence of “de-anchoring” in inflation expectations. Powell was quick to blame tariffs for the rise in short-term expectations and pointed to long-term economic expectations remaining low and stable. He specifically points to the data in the NY Fed Survey of Consumer Expectations and market-based measures as evidence for his case.

Two of his statements stick out to me about the labor market and inflation:
- On the labor market: “What we have had is a low firing and low hiring situation. And it seems to be in balance now for - you know for the last six, seven, eight months.” This statement is a good overview of the current state of hiring. Unemployment remains low as there has been no major uptick in layoffs, but hiring has also slowed as demand for new workers gradually declines.
- On inflation: “We have had two very strong goods inflation readings in the last two months which is very unexpected.” The inflation outlook is extremely uncertain with tariffs and the Fed is looking at goods inflation as a signal. Powell mentioned these two monthly surprises in goods inflation twice in the Q&A session, and it sticks out to me as the upside risk that the Fed is watching out for on the price front.
Source
The Federal Reserve kept rates unchanged at the target range of 4.25 to 4.50%. Describes inflation as “somewhat elevated and labor market conditions as “solid.” The Fed will consider data and the “implications of incoming information for the economic outlook” in its future monetary policy decisions.

Source
The Fed cuts by 25 bps to a range of 4.25-4.50%. In the statement, the Fed moves into data dependence mode as it “will continue to monitor the implications of incoming information for the economic outlook.” The FOMC will adjust its monetary policy stance if “risks emerge that could impede the attainment of the Committee's goals.” There was one dissenter who opted to keep rates unchanged. The Fed also released its SEP.

The Fed has upgraded its projections of growth in 2024 and 2025 by 0.5 ppts to 2.5% and 0.1 ppts 2.1% respectively. Largely, this reflects stronger-than-expected growth in Q3 and another strong quarter likely in Q4. The 2025 shift looks more significant in the histogram. The mode has shifted from between 1.8% to 1.9% to 2.0% to 2.3%.

The Fed has adjusted its view of the labor market to account for stronger employment in the second half of 2024 and slightly stronger employment in 2025. Many more individuals have moved from expecting the unemployment rate at either 4.4% or 4.5% to either 4.2% or 4.3%. This appears to be an admission that the labor market is tighter than FOMC members initially thought and that the gradual weakening of the labor market might be very slight.

Inflation projections have moved quite considerably. The FOMC has admitted that core PCE inflation will overshoot its September projection at the end of 2024 with a reading around 2.8%. More concerning is a significant increase in the 2025 projection. Instead of core PCE inflation easing to 2.2% in 2025, the Fed now sees its favorite inflation indicator only falling to 2.5% by the end of next year. The upper bound of the range of FOMC projections increased 0.7% from September to December and sits at an ugly 3.2%. This could be the beginning of the Fed bringing the inflation mandate back into focus.

The Fed has completed a hawkish repositioning in response to stronger-than-expected growth and employment and renewed inflation concerns. The median forecast for the Fed funds rate at the end of 2025 was increased by 50 bps to 3.9% (Sep projection: 3.4%) in a significant upward shift in the distribution. There does seem to be a stronger consensus on where rates could land next year. 10/19 projections have a FFR midpoint of 3.9% with others split above or below that point roughly evenly.

In 2026, there was a similar increase in the projection for the FFR by 50 bps to 3.4%. The distribution for projections shifted to the right but was more spread out. The range of projections was actually unchanged from September at 2.4% to 3.9%. In 2027 and the long run, the Fed sees rates settling at a higher level than before. The median long run rate, often used to represent where FOMC members see the neutral Fed funds rate, ticked to 3.0% with a mode being a range of 2.9% to 3.1%. Several members see a long-term rate settling above 3.3%.

December falls to -2.5 ppts (or 250 bps of cuts). This is the second largest month in terms of cutting (behind only last month) since the pandemic.

Source