• As expected, there is no change in rates: Fed Funds range is 4.25% to 4.5%.
• On average, FOMC members expect two rate cuts later this year.
• Uncertainty has “diminished.”

Not enough 

The Federal Open Market Committee (FOMC) left short-term rates unchanged for a fourth consecutive meeting today. In its press release, the Committee acknowledged tariff trauma but stated that “economic activity has continued to expand at a solid pace.” 

Recognizing that worries over tariffs have lessened, the statement went on to say that uncertainty about the outlook has “diminished but remains elevated.” Statements about labor conditions remaining solid and that inflation “remains somewhat elevated” were repeated from May’s meeting. The administration has delayed the worst of the tariffs for the moment. The economy has slowed from last fall’s levels, but not enough to prod the Fed to cut rates. 

Projections

Each quarter, the Fed staff and Committee members update their projections for the economy. This quarter’s update shows the Fed moved toward our views on inflation. To wit: that inflation will rise toward 3% by the end of the year and average 2.4% next year. If that forecast were to come about, it would mark six years of inflation hovering above the Fed’s 2% inflation. 

There was no change in the staff’s view of short-term interest rates in the future during the federal reserve meeting. Their median projection over the long haul is 3%. That level represents the rate where they think Fed policy neither holds back nor boosts economic activity. If that is the case, then the Fed would need to cut at least 1.25% out of the Fed Funds rate to get to “neutral.” And that would leave the neutral rate equal or very close to their projection of 3% inflation. 

Last quarter, four FOMC members thought the Fed should not cut rates this year. In this update, seven members do not see a rate cut this year. Eight Committee members think there will be two quarter-point cuts later this year, unchanged from the first quarter. 

The punchline for projections is that unemployment rises by one-tenth to 4.5% and core inflation goes up by three-tenths by the end of the year. Economic growth drops from 1.7% in March to 1.4%, thanks to tariff uncertainty.

Powell

Chairman Powell said in his opening remarks that the appropriate thing to do is “hold where we are.” He wants to be able to respond to tariff inflation, if it comes, by raising rates. Conversely, tariff or war uncertainty that causes consumers and businesses to sit on their hands would cause the Fed to continue last fall’s cutting cycle. Powell mentioned that the Fed is “beginning to see some effects” from tariffs but does not know if they are going to push prices up or down. 

Summary

Short-term rates will not change this summer. Powell will deliver a policy speech at the Kansas City Fed’s Jackson Hole symposium in late August. Once the policy direction is known, then markets will position for a rate change, likely for another quarter-point cut at some point in the fall. 

We still think markets and economies will adapt to the tariff landscape and resume growth in the fall. In that case, no cuts are needed by the Fed, and that remains our base case. 

Consumer and business sentiment remains negative, though improved from March/April levels. Hiring and crude prices over the next few months will be key to the Fed’s “hard data” decisioning. We think the economy continues to drift in first gear, waiting on Congressional efforts on the tax bill and geopolitical developments. 

Please let us know how we can help you. 

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here. 

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