Fed holds rates in June; Powell wary of tariff impact on inflation

19 Jun 2025 , 09:24 AM

WHAT DO THE DATA POINTS TELL US?

Ahead of the Fed  statement, most data points have been broadly in sync with expectations of the Fed. The Fed had projected a spike in consumer inflation and pressure on growth. The first quarter ended March 2025 saw contraction in US GDP, while CPI inflation for May was up 10 bps at 2.4%. The PCE inflation and the third estimate of Q1-GDP are expected next week, but is unlikely to change too much. The only data point favouring a rate cut is the unemployment rate, which has been steady at 4.2% for last 4 months. However, the Fed expects the spillover impact of higher inflation and lower GDP growth to hit jobs too. That has made the Fed doubly cautious about cutting rates.

WHAT WE READ FROM THE JUNE 2025 FOMC STATEMENT

Once again, political pressures were there; but the FOMC opted to hold the rates in the range of 4.25%-4.50%. Here are key takeaways from the Fed statement.

• Fed chair Jerome Powell cautioned the markets that the first signs of the reciprocal tariffs were being seen on growth and inflation. Powell had reiterated in his speech that the first quarter contraction in GDP was more due to front-ending of imports. Fed does not want to take chances ahead of the tariff deadline of July 09, 2025.
• Powell has made an interesting point in his Fed statement that, tariffs will ultimately be passed on to the consumer in some form, and that would mean an increase in price, and therefore higher inflation. According to Powell, tariffs are an unavoidable cost increase to businesses and consumers, in whatever form and nomenclature it is levied.
• Since someone has to pay for the higher tariffs (eventually the end consumer), most economists are projecting a meaningful increase in inflation in the coming months. The Fed statement has underlined that higher rates may mean some sacrifice on growth; but that would be a worthy cause if the impact of tariff inflation was reined in.
• The FOMC dot plot chart projected two rate cuts of 25 bps each in 2025. However, Powell has warned that the dot plot outcomes must be taken with a pinch of salt. In times of economic uncertainty, longer term projections may not have much meaning, especially if macros are in a state of flux.
• Powell made an important point on inflation; that tariffs take time to show up as higher prices. That is because, when distributors are selling legacy inventory, they have the ability to keep prices low. However, once the inventory costs start to go up, that is when the cumulative impact on inflation is visible.
• Finally, if one looks at the number of FOMC members opposed to a rate cut, the numbers have been steadily increasing. This time 7 members called for no rate cut, against just 4 in the last meeting. Fed is likely to stay focused on the short-term risks, rather than on longer term mitigating factors.

For now, markets are betting that inflation risks should vanish as quickly as they emerged. However, the Fed is not willing to take chances.

CONSUMERS WILL ULTIMATELY PAY THE TARIFF COSTS

An interesting argument proffered by Powell for holding Fed rates at 4.25%-4.50% is that ultimately the consumers have to pay for the tariff hike. Past data is testimony that when tariffs are hiked, eventually the consumer pays the full or part of the costs, and that is what inflation is about. Trump argues that producers will absorb most of the recent tariffs on automobiles and Chinese imports. However, the final impact will be transmitted; either directly or indirectly to end consumers.

Powell offers an interesting explanation for delayed impact of tariffs, as legacy goods do not carry price risk. It is only when legacy inventory is exhausted that consumer bear the brunt. That should start soon. The 10 bps spike in inflation in May 2025 was the tip of the iceberg and there could be more to come. Tariffs may not be as steep as initially claimed by Trump. However, that only mitigates the risk of inflation, but does not eliminate the risk of inflation altogether. That is why Fed is wary.

CME FEDWATCH STILL HOLDS ON TO 2 RATE CUTS IN 2025

The CME Fedwatch captures probabilities of rate moves at each upcoming Fed meet.

Fed Meet	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	10.3%	89.7%
Sep-25	Nil	Nil	Nil	Nil	Nil	Nil	6.5%	60.1%	33.5%
Oct-25	Nil	Nil	Nil	Nil	Nil	3.3%	34.0%	46.4%	16.3%
Dec-25	Nil	Nil	Nil	Nil	2.3%	24.3%	42.5%	25.8%	5.1%
Jun-26	Nil	0.9%	5.3%	16.0%	27.6%	27.9%	16.5%	5.2%	0.7%
Dec-26	3.5%	8.5%	17.1%	24.0%	23.3%	15.3%	6.4%	1.6%	0.2%

Data source: CME Fedwatch

For 2026, we have only considered two milestone meetings of June 2026 and December 2026. Here is what we read.

• It now looks like rate cuts are unlikely in July meeting also, with the first possibility of rate cut only in September 2025; that too with a probability of 66.5%.
• As of December 2025, there is an 69.1% probability that rates would be cut by at least 50 bps. Medium term outlook is dovish, but conviction is reducing.
• As of December 2026, there is 91.8% probability of 1 more rate cut in 2026 and 76.5% probability of 2 more rate cuts in 2026. That is fairly dovish.

The CME Fedwatch is hinting at 2 rate cuts in 2025 and another 2 rate cuts in 2026. However, as Powell admitted, when macros are in a state of flux, one has to take medium and longer term projections with a pinch of salt.