3 data points define the Fed’s one big economic risk
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Diverging Reports Breakdown
3 data points define the Fed’s one big economic risk
Federal Reserve officials now see a combination of slower growth and higher inflation in 2025. The central bank lowered its 2025 GDP forecast to 1.4% from 1.7%. The Fed also moved up its unemployment forecast slightly to 4.5% from 4.4%. In sum, these projections show one clear economic risk — stagflation — where economic growth stalls out and inflation remains well above the Fed’s 2% target. But there’s clearly both significant debate and uncertainty within the central bank about which way the economy will shift next and that debate is likely to define the economic narrative for the summer of 2025.
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The Federal Reserve’s June meeting came and went with few surprises.
As Citi’s head of equity US equity trading strategy Stuart Kaiser wrote in a note to clients, it was a “Blah FOMC” for markets as stocks closed Wednesday’s session nearly unchanged.
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But within the Summary of Economic Projections (SEP) were details critical to understanding where the economic risks lie headed into the summer months as many economists believe tariffs will begin to have a larger impact on the economic data.
Federal Reserve officials now see a combination of slower growth and higher inflation in 2025. Specifically, the central bank lowered its 2025 GDP forecast to 1.4% from 1.7% while raising its outlook for “core” PCE inflation to 3.1% from 2.8%. The Fed also moved up its unemployment forecast slightly to 4.5% from 4.4%.
In sum, these projections show one clear economic risk — stagflation — where economic growth stalls out and inflation remains well above the Fed’s 2% target.
Charles Schwab senior investment strategist Kevin Gordon said the economic projections provided a “perfect snapshot” on why the Fed hasn’t moved interest rates yet. There are risks to the upside for inflation, which would typically have the Fed favoring higher rates. And there are risks to the downside for growth and the possibility of further weakening in the labor market, which would typically have the Fed cutting interest rates.
Now the key question is which way the data turns.
Seven Fed officials penciled in no interest rate cuts this year, likely focusing on the potential rise in inflation. Eight officials penciled in two interest rate cuts, likely looking to support any potential weakening in the labor market as tariffs weigh on economic growth.
While the “median” projection from June’s “dot plot,” which maps out policymakers’ expectations for where interest rates could be headed in the future, projected two interest rate cuts this year, there’s clearly both significant debate and uncertainty within the central bank about which way the economy will shift next.
And that debate is likely to define the economic narrative for the summer of 2025.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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Source: https://finance.yahoo.com/news/3-data-points-define-the-feds-one-big-economic-risk-100011528.html