The Federal Reserve is widely expected to leave interest rates unchanged at next week’s policy meeting, with investor attention turning to updated economic projections that will reveal how policymakers are weighing recent soft economic data against unresolved trade tensions, budget uncertainty, and escalating conflict in the Middle East.
Recent inflation figures have helped ease fears that President Donald Trump’s tariff hikes would quickly drive prices higher, while the latest U.S. employment report showed a slowdown in job growth. Together, these factors would normally support the case for the Fed to resume rate cuts.
Trump has publicly demanded an immediate full percentage point cut in interest rates—a bold move that would suggest strong Fed confidence in inflation returning to its 2% target, even amid significantly looser financial conditions and aggressive trade measures from the administration.
That approach, however, faces risks. Overnight, oil prices surged nearly 9% after Israeli airstrikes on Iran, potentially reversing a four-month decline in energy costs that has helped contain inflation. Iran, a major oil exporter, could cause further disruptions if tensions escalate.
While energy prices now play a smaller role in U.S. inflation than during the oil crises of the 1970s, sudden commodity price spikes and geopolitical instability still factor into Fed decision-making. A notable example was the Fed’s modest quarter-point hike in early 2022, prompted by Russia’s invasion of Ukraine, despite some officials pushing for a larger increase before the war broke out.
Trade policy remains a wild card. Since the Fed’s last meeting in May, the Trump administration postponed a planned new wave of global tariffs to next month. Though tensions with China have cooled slightly, they remain unresolved, and a major tax and spending bill remains in limbo in Congress.
In its March projections, the Fed had penciled in two quarter-point rate cuts this year. At the time, Fed Chair Jerome Powell acknowledged that in times of uncertainty, the best course might be to hold steady—a sentiment that may persist as long as trade and geopolitical tensions remain high.
“Fed officials have recently signaled a patient, wait-and-see stance,” wrote Gregory Daco, chief economist at EY-Parthenon, ahead of the June 17–18 meeting. He expects the Fed’s updated projections to still show two cuts in 2025, but with a tone of “cautious patience” and minimal forward guidance given the prevailing uncertainty.
That view is broadly reflected in financial markets, where rate futures still price in rate cuts—but now increasingly lean toward a third cut after inflation data for May came in softer than expected. Year-over-year inflation, as measured by the Fed’s preferred PCE index, remains about 0.5 percentage points above the 2% target, but recent three-month trends (excluding food and energy) suggest inflation is close to target.
The unemployment rate has held steady at 4.2% for the past three months.
“Becoming Increasingly Clear”
The Fed last adjusted rates in December, cutting its benchmark to a range of 4.25%–4.50%, part of what was then expected to be a series of reductions. However, Trump’s reintroduction of sweeping tariffs after taking office in January reignited inflation concerns and raised the risk of weaker growth—placing the Fed in a difficult position: prioritize inflation control or support a slowing economy.
Since the market backlash that followed Trump’s “Liberation Day” tariff announcement, recession fears have eased, especially after he stepped back from the most aggressive measures. Goldman Sachs now places U.S. recession odds at just 30%, expecting slightly better growth and lower inflation this year.
Still, Goldman hasn’t altered its Fed rate forecast and expects the central bank to hold off on cutting rates until December due to potential inflation bumps this summer.
Tim Duy, chief U.S. economist at SGH Macro Advisors, noted that the Fed may revise its 2024 forecast to just one rate cut, simply due to time constraints. If officials still project two cuts, it would signal stronger confidence than before. However, he added that after Trump’s tariff shock, officials may now be more hesitant.
It would only take a shift in the outlook of two Fed officials to alter the consensus forecast and push rate cuts further into 2025.
An alternative scenario is also emerging: that tariffs are not leading to inflation because consumer demand is weakening. Households may be reducing spending on services to offset the higher cost of imported goods—a trend that may already be underway.
Next week’s retail sales data for May, due just before the Fed meeting, could shed light on this. Citi economists believe this weakening demand could drive inflation lower, push up unemployment, and prompt faster Fed rate cuts—starting as soon as September and continuing into 2026.
“While tariffs might lift some goods prices, falling core services inflation suggests a one-off price impact,” Citi analysts wrote. “Markets haven’t yet priced in that softer demand could ease inflation but also drive unemployment higher. The path to rate cuts is becoming increasingly clear.”
