Fed Meeting: Rates Steady, New Forecast Holds Key for Markets

This week, Federal Reserve officials gather for a pivotal policy meeting, and while immediate changes to interest rates are widely anticipated to be on hold, the crucial economic forecast released afterward is poised to capture market attention and signal the potential path ahead for borrowing costs.

Against a complex backdrop of global economic uncertainty, including the potential impacts of new tariffs and ongoing geopolitical tensions, the Federal Open Market Committee (FOMC) is expected to maintain its benchmark federal funds rate at the current level. This decision underscores the central bank’s “wait-and-see” posture, allowing officials more time to assess incoming economic data. As one economist put it, policy is currently seen as “in a good place,” removing the urgency for immediate action.

Why Rates Are Expected to Hold Steady

Several factors support the expectation that the Fed will keep rates unchanged:

Cooling, But Persistent Inflation Risk: While recent inflation reports have shown some welcomed moderation, the risk of persistent price pressures remains a concern. The Fed needs greater confidence that inflation is sustainably moving towards its 2% target.
Resilient, Yet Softening Labor Market: The job market, while not as robust as a year ago, remains relatively healthy. Recent data, such as the May nonfarm payrolls report showing gradual softening, is being monitored closely. However, it hasn’t yet signaled the kind of significant stress that would compel the Fed to cut rates quickly.
Data-Dependent Approach: Fed Chair Jerome Powell and other officials have consistently emphasized their reliance on “hard” economic data over forecasts or sentiment indicators. They are waiting for clearer signals before adjusting policy.

The Crucial Dot Plot and Rate Cut Expectations

The main event for markets will be the release of the FOMC members’ updated economic projections, particularly the “dot plot.” This chart shows each member’s individual forecast for the future path of interest rates.

At the last update in March, the median forecast indicated the equivalent of two quarter-percentage-point rate reductions this year. However, that consensus was narrow. Experts now widely anticipate that the new dot plot will signal fewer cuts for 2025, potentially shifting the median forecast down to just one rate reduction, or even none, which would be viewed as a more “hawkish” stance.

This expected shift reflects increased uncertainty and concerns about the potential for stubborn inflation, particularly driven by external factors.

Key Factors Shaping the Fed’s Outlook

The economic landscape presents several crosscurrents influencing the Fed’s projections:

The Tariff Wildcard: The potential impact of new tariffs is a significant source of uncertainty. While the effect on inflation has been minimal so far, the future is unclear. Tariffs could lead to higher import costs being passed on to consumers (increasing inflation) or disrupt trade and slow economic activity (threatening growth). This creates a challenging “stagflationary” risk – a scenario of rising prices alongside slowing growth – that complicates the Fed’s dual mandate. The Fed is focusing intently on the future inflationary potential of these policies.
Labor Market Evolution: Continued monitoring of employment data is essential. A significant downturn in the labor market could prompt the Fed to consider easing policy to support employment, aligning with the other half of its mandate.
Geopolitical Risks: Events like the Israel-Iran conflict add another layer of complexity, with the potential to destabilize global energy markets and impact inflation through energy prices.

Political Landscape: Although the Fed maintains its independence, ongoing calls from some political figures for easier monetary policy add to the backdrop.

Broader Economic Projections Signal Shifts

Beyond interest rates, the updated economic projections are likely to show adjustments to the Fed’s outlook for the broader economy. Forecasts from major firms suggest potential revisions, such as a slight upward tick in the inflation expectation for 2024, a modest lowering of the gross domestic product (GDP) growth forecast, and a tick higher in the unemployment rate. These changes paint a picture of potentially slower growth alongside persistent price pressures.

Market Expectations and the Path Ahead

Financial markets have largely priced in the expectation of the first rate cut occurring later this year, commonly pointing towards September as a likely starting point. However, this timing remains highly contingent on how the economic data, particularly concerning inflation and the impact of tariffs, evolves over the summer months. The Fed will be watching closely before making any definitive moves.

Implications for Borrowers: Mortgage Rates Expected to Remain Elevated

For consumers, particularly those considering buying a home or refinancing, the Fed’s cautious stance and the economic uncertainties have direct implications. Mortgage rates are closely tied to the yield on 10-year Treasury bonds and are heavily influenced by the Fed’s overall monetary policy stance and inflation expectations.

As a result of the expected “higher-for-longer” rate environment and the added uncertainty from factors like tariffs, mortgage rates are generally forecast to remain elevated. Experts anticipate average 30-year fixed mortgage rates hovering in the mid-to-high 6% range through much of 2025. Significant declines are not widely expected unless there is a more substantial economic downturn. This means refinancing remains challenging for most borrowers who locked in historically low rates, and affordability continues to be a major hurdle in the housing market.

In summary, while the Federal Reserve is set to keep interest rates steady this week, the key takeaway will be the updated forecast. This crucial “dot plot,” likely signaling fewer rate cuts than previously anticipated amidst uncertainty driven significantly by potential tariff impacts, will be the primary signal guiding market expectations and the potential path for borrowing costs later in the year. The Fed remains firmly in a data-dependent, wait-and-see mode.