Fed Jun-25 projections build in much-feared tariff risks

19 Jun 2025 , 01:58 PM

FIRST THE WARNING, NOW THE DOWNGRADE IN MACROS

In the March 2025 quarterly projections, the Fed had cut the GDP growth projections for 2025; as also raised the unemployment projections and hiked inflation expectations. In the June projections, these concerns have deepened since we are not just talking about Trump tariffs, but also about an ongoing war in Ukraine and an aggravating Israel-Iran war. There are heightened fears that if Iran blocks the Strait of Hormuz, Brent Crude prices could spike above $90/bbl, with a sharp impact on inflation and growth. Between Dec-24 and Jun-25, the US GDP growth estimate for CY2025 was cut by 70 bps from 2.1% to 1.4%.

HOW THE US MACRO STORY PANNED OUT IN LAST 4 YEARS

Here is a quick recap of the data points of last 4 years with median projections.

Variable	CY-2021	CY-2022	CY-2023	CY-2024	CY-2025 #	CY-2026 #
Real GDP Growth	+5.7%	+1.3%	+3.2%	+2.5%	+1.4%	+1.6%
Unemployment Rate	+4.2%	+3.6%	+3.8%	+4.2%	+4.5%	+4.5%
PCE Inflation	+5.8%	+6.0%	+2.8%	+2.5%	+3.0%	+2.4%
Core PCE Inflation	+4.9%	+5.2%	+3.2%	+2.8%	+3.1%	+2.4%

Data Source: US Federal Reserve (# Median Projections)

It must be noted here that the data up to calendar year (CY) 2024 are actuals, while the data for CY2025 and CY2026 are projections. There are 4 notable factors about the way the annualized projections have changed for CY25 and CY26. Firstly, the Fed expects that the reciprocal tariffs will have an impact on growth, albeit indirectly. In Q1, GDP growth was impacted by front-ending of imports. That has led to reduction in CY2025 GDP growth estimates to 1.4%. What about headline inflation, core inflation, and unemployment?

Secondly, the tariffs have led to the CY2025 projections for unemployment being upped to 4.5%. That is well above the current figure of 4.2%. Thirdly, the PCE inflation target for CY2025 has been raised sharply to 3.0%, while the figure for CY2026 has been cut to 2.4%. Fourthly, this spike in headline PCE inflation will be triggered by a rise in core inflation, as the combination of tariffs and geopolitics is expected to create supply chain bottlenecks.

JUNE 2025 FOMC PROJECTIONS (VERSUS LAST 2 QUARTERS)

To get a progressive perspective, we look at June 2025 projections; compared with March 2025 and December 2024 projections.

Variable	CY-2025	CY-2026	CY-2027	Longer run
Change in real GDP (Jun-25)	1.4	1.6	1.8	1.8
Mar-2025 projection	1.7	1.8	1.8	1.8
Dec-2024 projection	2.1	2.0	1.9	1.8
Unemployment rate (Jun-25)	4.5	4.5	4.4	4.2
Mar-2025 projection	4.4	4.3	4.3	4.2
Dec-2024 projection	4.3	4.3	4.3	4.2
PCE inflation (Jun-25)	3.0	2.4	2.1	2.0
Mar-2025 projection	2.7	2.2	2.0	2.0
Dec-2024 projection	2.5	2.1	2.0	2.0
Core PCE inflation (Jun-25)	3.1	2.4	2.1
Mar-2025 projection	2.8	2.2	2.0
Dec-2024 projection	2.5	2.2	2.0
Federal funds rate (Jun-25)	3.9	3.6	3.4	3.0
Mar-2025 projection	3.9	3.4	3.1	3.0
Dec-2024 projection	3.9	3.4	3.1	3.0

 

Data Source: US Federal Reserve (CY refers to calendar year)

Here are 4 key takeaways from the table above.

• US GDP growth is likely to be an obvious casualty of tariffs and geopolitical risk. The CY2025 GDP growth projection has been lowered progressively from 2.1% to 1.4% in the latest June 2025 update. Impact on GDP is sharpest in CY2025 and CY2026.
• While the quarterly projection has raised unemployment in 2025 to 4.5%, the current unemployment has been surprisingly sticky at 4.2% for the last 4 months. It is very likely that, in the absence of macro shocks, the unemployment may end up being lower.
• PCE inflation projection for CY2025 has been raised by 50 bps to 3.0%, well above the current ongoing rate. The projections are factoring in the dual impact of tariff push and an oil price spike. Inflation story is being largely driven by core inflation.
• Interestingly, over the last 6 months, not much has changed in terms of rate projections. The FOMC dot plot chart is still pegging 2 rate cuts in 2025 and 1 to 2 rate cuts in 2026.

What would these changed projections mean for the Indian economy?

HOW WILL THE JUNE FED PROJECTIONS IMPACT INDIA INC?

For the RBI and for the Indian economy, there are 3 major observations from these changed Fed macro projections. Firstly, the US GDP growth for 2025 has been cut from 2.1% to 1.4%; between Dec-24 and Jun-25. Lower US GDP growth means lower export demand from India’s biggest market and the risk of tapering in tech spending.

Secondly, core inflation is expected to spike in the US in a worst-case scenario, and that is likely to impact India. India runs a merchandise deficit, so high core inflation in the US results in imported inflation for India. That is negative for the rupee too. Lastly, not much has changed on the rate cut trajectory. So, the 4 rate cuts by the RBI will not be much of a concern as it is unlikely to materially impact the direction of capital flows. This is assuming that the Israel-Iran war, India’s border situation and other trade risks do not aggravate!