Market Wire: Fed Holds Rates, Highlights "Diminished" Uncertainties

As had been widely anticipated, the Federal Reserve left benchmark borrowing rates unchanged this afternoon, and officials delivered a finely-balanced message in the accompanying communications, suggesting that they intend to remain on the sidelines until a clearer picture of underlying economic conditions can emerge.

The Federal Open Market Committee voted unanimously to maintain the target range for the federal funds rate between 4.25 to 4.50 percent, and in the statement setting out the decision, officials said “Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated”. A sentence that previously highlighted risks to both sides of the central bank’s dual mandate — inflation and employment — was removed, to be replaced with new language saying “Uncertainty about the economic outlook has diminished but remains elevated”.

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is still expected to end 2025 at around 3.875 percent—a level that implies two 25-basis point reductions this year, unchanged from the estimate published in March. The policy rate is then seen falling to 3.6 percent in 2026 and 3.4 percent in the following year, before settling near 3.0 percent in the long run, consistent with the prior estimate.

Under the updated forecasts, the core personal consumption expenditure price index is seen rising 3.1 percent this year — higher than the 2.8 percent pencilled in in March. Unemployment is expected to end 2025 at 4.5 percent, up from the 4.4 percent estimated under the previous projection. Growth expectations were lowered sharply, with the economy seen expanding just 1.4 percent in 2025, down from 1.7 percent previously.

Treasury yields are fairly steady across the curve, and the dollar is trading sideways, but odds on a rate cut at the September meeting are edging up slightly as traders position ahead of the post-decision press conference — which has often generated a more dovish interpretation during Jerome Powell’s time at the helm. We’re not sure this will prove durable: seen from a hawkish standpoint, the committee’s decision to highlight “diminished” uncertainty could suggest that policymakers are growing more confident in the economy’s capacity to withstand the tariff shock, and might set the stage for a more easing trajectory in the year ahead.

We will be watching closely over the next hour, and will update you on any material developments.