FOMC Update: Fiscal Challenges Taking a Back Seat to Geopolitical Risks

Details of the Fed Announcement

Despite pressure from the White House to reduce interest rates, the U.S. Federal Reserve (Fed) held firm, as expected. The Fed kept the fed funds rate in the 4.25-4.50% band amid expectations of higher inflation and lower economic growth and still pointed to two reductions in the second half of the year (3.9% projection for the end of 2025). However, it took off one cut for both 2026 and 2027, putting the expected future rate cuts at four (quarter-point cuts), which equals a full percentage point. There was wide dispersion, with an outlook pointing to a fed funds rate of around 3.6% in 2026 and 3.4% in 2027.

Seven of the 19 FOMC participants indicated they wanted no cuts this year, up from four in March. Economic projections pointed to further stagflationary pressures, with participants seeing gross domestic product advancing at just a 1.4% pace in 2024 and inflation hitting 3%. The FOMC statement changed little from the May meeting; the economy grew at a “solid pace,” with “low” unemployment and “somewhat elevated” inflation, the committee said.

Christian’s Views

• On paper, the setup for this Fed meeting is far less interesting than the economic and geopolitical backdrop. As expected, the Fed took no action today, but revised inflation forecasts higher and growth lower showing the Fed continues to be torn between serving its dual mandates.
  • Two cuts remain on the dots for 2025, with just one cut in 2026 and 2027, suggesting a higher terminal rate. We would not have been surprised to see 2025 updated to just one cut, but the 2026-2027 revisions offset this at the margin.
  • There were good reasons to get a dovish tilt today, but we did not get it.
  • I disagree with the level of precision that the Fed and other central banks think they can guide markets; it’s like leading a butterfly with a hurricane. Also, if jacking rates by 500 basis points didn’t throw the economy into chaos, then 100 or 200 basis points in cuts may not rescue the economy either.
  • Overall, the Fed is less impactful on markets right now. Tariff concerns have taken a backseat alongside fiscal challenges, with geopolitical risks in the Middle East in the driver’s seat.
  • As we enter the final 11 months of Chair Powell’s term, an early naming of his successor and the notion of a shadow Fed could rock interest rates.