FED PREVIEW: no cut in June, hopeful about September

The Federal Reserve's upcoming Federal Open Market Committee (FOMC) meeting is scheduled for June 17–18, 2025. This meeting will also include the release of the Summary of Economic Projections (SEP), offering insights into the Fed’s outlook on growth, inflation, and interest rates.

Interest Rate Outlook

Market expectations overwhelmingly point to no change in the federal funds rate, which currently stands at 4.25%–4.50%. According to Reuters’ rate probability models, there is a 98.8% chance that rates will remain unchanged. This reflects the continued resilience of the U.S. economy—where neither inflation nor labour market data has provided a decisive catalyst for policy easing.

May's Consumer Price Index (CPI) rose 2.4% year-over-year, slightly below the expected 2.5%, while core CPI remained steady at 2.8%. On a monthly basis, both readings showed prices rose 0.1%. Despite the readings being below forecasts, the inflationary pressures remain elevated at this point in the economic cycle. However, the data did enable markets to price in a higher chance of a 25 bps rate cut in September.

Meanwhile, the labour market showed the U.S. added 139,000 jobs in May, surpassing forecasts, with the unemployment rate remaining unchanged at 4.2%. It has long been viewed that the central bank is waiting for a signal from the jobs market to resume cutting rates and therefore the likelihood of further easing this year is diminishing. To be honest, the central bank is in an uncomfortable position. If it wanted to cut rates, it could find enough data to justify doing so, especially given rates remain highly restrictive. However, with short-term inflation expectations being revised higher because of the expected one-off price shock from tariffs, Powell and his team are unlikely to deviate from their “wait-and-see” approach.

Expected Changes in the Dot Plot

The Fed’s closely watched “dot plot”—a visual representation of individual policymakers’ rate projections—may also shift. In March, the median forecast implied two rate cuts in 2025, targeting a year-end rate of 3.9%. With inflation proving stickier than hoped, the June dot plot could show a more hawkish bias, signalling only one cut before year-end and lifting the median rate closer to 4.1%.

As a side note, President Donald Trump has renewed calls for a full percentage point interest rate cut, citing favourable inflation data. However, the Fed is expected to maintain its current stance, emphasizing data-driven decisions.

Market reaction

Recent market behaviour suggests cautious optimism. U.S. equities have edged toward new highs amid easing tensions with China and hope for eventual Fed easing. However, momentum has begun to fade, with investors hesitant ahead of clear policy direction. A dovish tone from Powell could re-energize risk appetite, while hawkish messaging may stall the current rally.

The U.S. dollar, meanwhile, has struggled to find support. Its performance hinges on the Fed’s outlook, especially as foreign investor confidence shows signs of waning.

Conclusion

While a rate cut is unlikely in June, markets are pricing in a 70% probability of a rate cut by September, contingent on upcoming economic data. The June meeting's SEP and Chair Powell's press conference will be pivotal in shaping market expectations for the remainder of 2025.