CB Views: June 2025 FOMC Preview

June FOMC Preview

It’s never “too late” to pivot (so long as it’s to the dovish side)

• Statement & Presser: The June FOMC meeting is expected to present a broadly neutral message that may lean dovish if the Fed stays true to being data dependent. Since the last FOMC meeting, uncertainty has only increased (given recent geopolitical events), and trade policy remains unresolved. There has been progress on fiscal policy, but the level of stimulus it will provide is up for debate. Historically, when the Fed has acknowledged monetary policy as being restrictive, they provided "insurance cuts" to offset the potential for negative growth shocks. This time, the Fed has been focusing solely on inflation risks. However, with that said, there is always a chance to pivot back to having a more balanced forward guidance. We expect the FOMC to acknowledge the near-term weaker trends that support a pivot to dovishness, with inflation easing more rapidly than expected (month-to-month) and the labor market continuing to soften.
• Summary of Economic Projections (SEP): Although it could be a close call, we expect the dots to further consolidate, yet at the same time remain largely unchanged in terms of medians until the next update. In other words, we expect the ‘25 and ’26 median rate projections to still show 2 cuts each year, and the ’27 median to show 1 cut. There is a dovish risk that the ’27 implied cut is pulled forward, bringing the median number of cuts to 3 in ‘26. As with the last SEP in March, and consistent with the US Macro Strategy team view, we expect FOMC participants to start to weigh the risks to growth and unemployment more heavily than inflation (breaking from recent speeches). The unemployment rate will likely tick up beyond the 4.4% year-end target from March's forecast, and if there are other changes to the growth/jobs outlook, more cuts could be pulled forward.
• Macro Backdrop: The labor market continues to add jobs, but the pace of hiring has slowed, and the quality of jobs continues to worsen. The consistently large downward monthly revisions to nonfarm payrolls, rising unemployment claims, and growth in job losses all highlight the underlying weakness. The labor market is likely not a source of inflationary pressures at this stage, and the effect of tariffs on consumer prices may be less potent than expected with import prices falling for consumer goods and corporate profit margins likely absorbing some of the effect (in order for businesses to maintain market share). Overall, the jury is still out for how inflationary tariffs will be versus how much demand is destroyed and how much growth slows as a result. Such an environment warrants a Fed pivot if they plan to start easing again into the second half of the year.
• Risks to Our View: The Fed may overlook cracks in the labor market and the overall risks to growth if they remain hyper-focused on the potential of inflation re-accelerating in the future. The Fed has been too dismissive of survey-based measures that show a deterioration in the jobs and growth outlook (like in The Conference Board, U-Mich, NFIB, and regional PMI surveys), while at the same time being too receptive (and holding back policy adjustments) to rising survey-based inflation expectations, despite market-based inflation expectations remaining well anchored. Indeed, the Fed should remain data dependent, but on the totality of available data, especially in today’s sensitive political environment. They risk losing credibility if they miscalculate on growth and are forced to cut rates by more down the line, than if they re-start cuts earlier. We also note that the Fed will likely lose more independence, perceived or real, once President Trump nominates the next Fed chair. If they act now, the Fed is better able to control the narrative and instill confidence in the process, versus having their backs against the wall and risk being seen as having been pushed into cutting rates.

Please see the link for the full write-up with charts and scenarios…