As expected, Fed left interest rates unchanged at 4.25%–4.50% today, with all FOMC members voting in favor of the decision. The real focus was on the revised projections, which revealed a cautious shift: while two rate cuts remain penciled in for 2025, the pace of easing slows meaningfully beyond that.
The median forecast now puts the federal funds rate at 3.6% by the end of 2026, up from 3.4% previously, and 3.4% by the end of 2027, up from 3.1%. This implies only one cut per year after 2025. The change suggests that the Fed is growing more concerned about stickier inflation, particularly as tariff-related price effects take longer to dissipate.
Inflation forecasts were lifted meaningfully. Headline PCE inflation is now expected to run at 3.0% in 2025, up from 2.7% previously, before easing to 2.4% in 2026 and 2.1% in 2027. Core PCE projections followed a similar pattern, raised to 3.1% in 2025 from 2.8% in March. These changes reflect Fed’s acknowledgment of tariff-related price pressures filtering through the economy more persistently than previously assumed.
Meanwhile, growth forecasts were trimmed, with real GDP now seen expanding just 1.4% in 2025, down from 1.7%. The 2026 estimate was also reduced from 1.8% to 1.6%. However, the unemployment rate is expected to remain relatively stable, only nudging up to 4.5% in 2025 and holding near that level through 2027.
The slight upward drift in the unemployment forecast likely reflects this softer growth outlook, though the impact is not severe enough to force Fed’s hand.
Overall, the message is clear: while cuts are still on the table, the Fed is prepared to ease more slowly and less deeply than markets had hoped. With tariffs adding upward pressure on prices but not severely denting the labor market, policymakers are likely to remain in wait-and-see mode, calibrating their response carefully.
