On Wednesday, the FOMC issued a statement. They voted to hold their benchmark overnight borrowing rate unchanged, leaving the Fed’s target range at 4.25% to 4.5%. With this decision, we see the extension of the current rate—the fifth consecutive month of no change since December of 2022. The committee just put out this announcement. No explanation was given as to why uncertainty surrounding economic forecasts has declined, when so many risks still persist.
The economic outlook remains complex. While President Donald Trump has softened his aggressive trade rhetoric, the White House is currently engaged in a 90-day negotiation period concerning tariffs. Each of these moves must have helped calm some extreme jitters in the market. Worst of all, the FOMC’s own concurrent economic projections show impending stagflationary pressures on the horizon.
The median participant of the forthcoming FOMC meeting is forecasting rather anemic GDP growth of only 1.4% through 2025. In return, they expect fairly strong economic growth over that time period. This forecast is a downward adjustment of 0.3 percentage points from prior estimates in March. Inflation is about to jump to 3%. Core personal consumption expenditures (PCE) price index Meanwhile, inflation is expected to reach 3.1%, a jump of 0.3 percentage point from previous forecasts.
The committee’s medium-term view on unemployment has not only improved in direction, but in magnitude as well. Additionally, nearly all meeting participants now see the unemployment rate eventually climbing to 4.5%. This figure is 0.1 percentage point higher than the estimates for March, and 0.3 percentage points above the level at present.
It seems the recent economic data set up a conflicting scenario as well. With retail sales down close to 1% in May, this could be a harbinger of weakening consumer demand. On the other hand, despite some recent positive news, the housing market is cooling down, with housing starts at their lowest in five years.
The FOMC’s statement revealed a cautious but watchful eye to the continued stormy economic seas ahead.
“Uncertainty about the economic outlook has diminished but remains elevated. The Committee is attentive to the risks to both sides of its dual mandate.” – Federal Open Market Committee (FOMC)
Despite these challenges, some FOMC participants foresee future rate cuts, estimating a cumulative reduction of four or one full percentage point later this year. Seven of the nineteen members expressed their wishes to prevent all cuts this year. This amplifies the importance of the committee’s internal divisions on approach to the persistent economic turmoil.
The fiscal impact of these decisions goes way beyond the interest rate. This year, interest on the national debt is on track to exceed an incredible $1.2 trillion. Yet it will do this beyond everything else in our entire budget—including Social Security and Medicare. This is emblematic of the larger fiscal realities that lawmakers will have to grapple with as they weigh the next steps in monetary policy.