Will the Federal Reserve keep interest rates unchanged at June meeting?

Fed maintains cautious stance amid mixed signals

​The Federal Reserve (Fed) is widely expected to keep interest rates unchanged at its upcoming meeting, as robust economic data supports the central bank's cautious approach amid global uncertainties.

At its last meeting, the Fed held the Federal Funds rate at 4.25% – 4.50%, citing rising risks of higher unemployment and persistent inflation. Fed Chair Jerome Powell noted the economy remains solid, and that the Fed will monitor the impact of President Trump's tariff policy before making any moves.

This measured approach reflects the Fed's commitment to data-driven decision making rather than responding to short-term political or market pressures. Powell has consistently emphasised that monetary policy decisions will be based on economic fundamentals rather than external pressures.

The central bank's caution appears well-founded given the complex economic environment, where traditional indicators are sending mixed messages about the underlying health of the economy and the appropriate path for monetary policy.

While survey data has softened, hard data including the recent non-farm payrolls remains robust. This divergence between soft and hard data creates challenges for policymakers attempting to gauge the true state of the economy and the appropriate policy response.

Inflation dynamics support current policy stance

The Fed's preferred inflation measure, the core personal consumption expenditures (PCE) price index, stands at 2.5%, showing no tariff-related inflation surge. This relatively benign inflation environment provides the Fed with flexibility to maintain its current approach without immediate pressure to tighten policy.

The absence of significant tariff-related inflation thus far suggests that the economic impact of trade policy changes may be more nuanced than initially feared, though the Fed remains vigilant for any signs of price pressures emerging.

As such, the Fed is expected to maintain current rates while reiterating its data-dependent stance. This approach allows the central bank to respond to changing conditions without being locked into a predetermined path that may prove inappropriate as circumstances evolve.

Powell is expected to emphasise a cautious approach and resist political pressure to cut rates prematurely. This independence is crucial for maintaining credibility and ensuring that monetary policy serves long-term economic stability rather than short-term political objectives.

Market expectations reflect gradual easing path

Markets are pricing in no change on Wednesday 18 June, with an 65% chance of a 25 basis point cut in September and 50 basis points of cumulative easing priced by year-end. These expectations suggest that investors anticipate a gradual and measured approach to any policy adjustments.e a gradual and measured approach to any policy adjustments.

​CME FedWatch Tool 

The market's pricing indicates confidence that the Fed will only ease policy if economic conditions clearly warrant such action, rather than implementing pre-emptive cuts based on potential future risks.

This measured market expectation contrasts with some periods when investors have pushed for more aggressive policy action, suggesting a more mature understanding of the Fed's approach and the current economic environment.

The September timeline for potential easing aligns with the Fed's preference for having sufficient data to assess economic trends before making significant policy changes, providing time for any impacts from current policies to become apparent.

US economic strength enables higher rate environment

The high US interest rates highlight how the United States has maintained higher interest rates compared to other developed economies, reflecting its robust economic performance and the Fed's monetary policy stance.

US interest rates chart

The US economy's strength allows it to sustain higher interest rates, attributed to factors such as strong consumer spending, low unemployment, and robust gross domestic product (GDP) growth. These fundamentals have enabled the Fed to keep rates elevated without significantly hindering economic activity.

In contrast to other developed nations, many of which have adopted lower interest rates to stimulate growth, the US's higher rates underscore its economic resilience. This divergence has implications for global capital flows, with investors often favouring US assets for better returns.

This economic exceptionalism reflects deeper structural advantages in the US economy, including flexible labour markets, technological innovation, and strong institutional frameworks that support sustained growth and productivity improvements.

Global implications of US rate policy

The sustained higher rates in the US impact various investment decisions globally. They can strengthen the US dollar, affect bond yields worldwide, and influence equity markets across different regions as capital flows respond to interest rate differentials.

Investors should consider these factors when allocating assets globally, as US monetary policy has far-reaching implications for international markets and investment strategies. Any US dollar strength, supported by higher yields, affects commodity prices and emerging market currencies.

This rate differential may create opportunities for currency traders and international investors, while also creating challenges for countries with significant dollar-denominated debt or trade relationships with the United States.

The relationship between US rates and the greenback is not always straight forward as can be seen by this year's 10% depreciation in the US dollar index from its January peak at 110.01 to last week's over 3 ¼ year low at 97.13.

US dollar basket weekly chart

Uncertainty surrounding President Trump's tariffs policy and persistent US fiscal concerns and rapidly rising government debt have led investors to reduce exposure to US assets and the greenback, despite the relatively high interest rate differential with other major central banks' rates.

The global nature of financial markets means that Fed policy decisions reverberate far beyond US borders, influencing central bank policies, capital allocation decisions, and economic conditions in countries around the world.

Potential risks and future considerations

While higher rates indicate economic strength, potential risks remain if rates stay elevated for extended periods. They could eventually dampen borrowing and spending, leading to slower growth as the cumulative impact of higher borrowing costs affects economic activity.

Additionally, global economic conditions and geopolitical factors could influence the sustainability of this economic exceptionalism. Changes in international trade relationships, commodity prices, or financial market conditions could alter the economic dynamics supporting current policy.

The Fed must balance the benefits of maintaining higher rates for financial stability and inflation control against the risks of constraining economic growth or creating financial stress in rate-sensitive sectors of the economy.

Monitoring these potential challenges will be crucial for determining whether the current policy stance remains appropriate as economic conditions evolve and new data becomes available.