Fed officials see two rate cuts in 2025, but overall turn hawkish

The Federal Reserve is increasingly divided on future monetary policy, with the median forecast indicating a 0.5% rate cut by year-end, while a growing minority anticipates no cuts; the decision to hold rates steady at 4.25%-4.50% was unanimous. June's economic projections reveal policymakers expect higher inflation (3.0% by year-end) and unemployment (4.5% this year) compared to March, reflecting concerns over the impact of trade policies. For 2025, the median forecast suggests a slightly more hawkish stance, with a year-end policy rate of 3.6%.

Analysis

U.S. Federal Reserve policymakers exhibit an increasing divergence regarding the future trajectory of monetary policy, despite a unanimous decision to maintain the current federal funds rate target in the 4.25%-4.50% range. While the median projection from the latest June forecasts still indicates a potential 50 basis point reduction by year-end, a significant and growing minority of officials—seven out of nineteen, up from four in March—now anticipates no rate cuts in the current year, with eight expecting rates to fall to 3.75%-4.00% and two favoring an even larger cut. This internal split underscores heightened uncertainty. Concurrently, policymakers have revised their economic outlook, now expecting headline PCE inflation to reach 3.0% and core PCE inflation to hit 3.1% by year-end, both higher than previous estimates. They also project a rise in the unemployment rate to 4.5% this year (up from 4.4% anticipated three months ago) alongside weaker overall economic growth, partly attributed to the anticipated effects of trade policies under the Trump administration. Looking further ahead, the median forecast for the policy rate at the end of 2025 has shifted to 3.6%, a slightly more hawkish stance compared to the 3.4% projected in March, suggesting a potentially slower easing cycle or a higher terminal rate than previously anticipated.

Key Decisions for Investors

• Investors should brace for heightened market volatility surrounding future Federal Reserve communications and key economic data releases, given the increasing internal division on rate policy and the 'uncertain' tone of current signals.
• Consider re-evaluating portfolio exposure to interest rate-sensitive assets and sectors, as the prospect of fewer or no rate cuts this year gains traction among policymakers, contrasting with the median expectation of a 50 basis point cut.
• The revised forecasts for higher inflation (3.0% PCE) and unemployment (4.5%), alongside a more hawkish 2025 rate outlook (3.6%), warrant a cautious stance and a potential shift towards strategies that can navigate persistent inflation and slower economic growth.