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Key takeaways
The U.S. Federal Reserve (Fed) maintained its policy interest rate range of 4.25%-4.50% as expected, with the intent of bringing inflation closer to its 2% target.
Updated Fed projections suggest a somewhat downgraded 2025 economic outlook versus March, with the median growth projection declining slightly and inflation and unemployment expectations increasing.
Investors now anticipate two rate cuts in 2025; estimates fluctuated from one to four cuts year-to-date amid tariff uncertainty.
The Federal Reserve held its target federal funds interest rate in a range of 4.25%-4.50% following its regularly scheduled two-day meeting, a widely anticipated outcome. The Fed has held rates steady since previously cutting rates by a total of 1% in 2024’s second half. The updated official statement noted, “Uncertainty about the economic outlook has diminished but remains elevated.” Meanwhile, investors anticipate two 0.25% rate cuts this year, in line with updated median Fed projections. The Fed has held rates steady so far this year due to resilient economic data, lingering above-target inflation and tariff uncertainty.
Consensus economist and Fed projections downgraded the 2025 economic growth outlook since the announcement of planned tariffs from the Trump Administration, while increasing inflation expectations. However, Fed Chairman Jerome Powell said during the press conference that the Fed remains in a good position to exercise patience before changing policy rates, citing a still-solid U.S. economy and only narrow signs of higher prices in a subset of goods.
The Fed updated its Summary of Economic Projections (SEP), a release detailing its forward views on growth, inflation, employment and interest rates, which mirrored broader economist forecasts for a somewhat diminished outlook into year-end. Fed members’ median 2025 economic growth projections declined to 1.4% from 1.7% in March while core inflation projections increased to 3.1% from 2.8% and unemployment estimates increased slightly to 4.5% from 4.4%.
Aggressive policy tightening in the form of rate hikes between early 2022 to mid-2023 helped drive the Core Personal Consumption Expenditures Price Index (Core PCE), the Fed’s preferred inflation gauge, from a peak above 5.5% year-over-year in 2022 to 2.5% in April. The Fed targets inflation near 2%.
The Fed slowed the monthly reduction in its $6.4 trillion bond holdings earlier this year. Its bond holdings peaked at $8.5 trillion in 2022 before they allowed bonds to mature without replacement up to $60 billion per month, then shrinking the pace of bond “runoff” in April to $40 billion per month. Slower or no balance sheet runoff improves market liquidity relative to faster runoff. Liquidity refers to the amount of money readily available to buy goods, services and financial assets in an economy. Strong liquidity can also provide cushion against unforeseen financial market shocks, and liquidity measures remain constructive for now.
Stock returns were mixed Wednesday, with large stocks, represented by the S&P 500, falling 0.03% while small stocks represented by the Russell 2000 Index rising 0.52%. Treasury bond yields rose slightly. Ten-year Treasury bond yields ended the session unchanged at 4.39%, while two-year Treasury yields fell 0.01% to 3.94%.
Monetary policy, defined as central bank target interest rates, remains restrictive in most geographies around the globe. However, policy is easier overall, with central bank rate cuts exceeding hikes starting in the fourth quarter of 2023 and continuing through the current quarter. The Fed remains an outlier; as several other major central banks have cut rates multiple times this year, including the Bank of England, European Central Bank, Bank of Canada and the Reserve Bank of Australia.
We retain a glass half full outlook for diversified portfolios, acknowledging the contrast between solid recent economic data versus potential negative impacts from tariffs. While consumer and business surveys and economist forecasts suggest growth will decelerate and inflation will accelerate into year-end, these fears have not yet manifested in broader economic readings. We see evidence of solid current economic activity in strong corporate earnings releases, stable hiring data and robust aggregate consumer activity based on high frequency indicators such as consumer spending, credit and debit card swipe data, restaurant bookings and TSA security checkpoint activity at airports. We will keep you informed of our views as new data becomes available and as we update our assessment of market conditions.
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This information represents the opinion of U.S. Bank. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.
Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The Personal Consumption Expenditures (PCE) Price Index is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. It is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.
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