Fed Speak - Outlook for US Monetary policy; June 2025

12 Jun 2025 , 09:31 AM

BACKGROUND TO THE JUNE 2025 FED POLICY ANNOUNCEMENT

The June 2025 Fed policy will be critical as it comes just ahead of the end of the tariff pause. Along with the Fed statement, FOMC members will also release quarterly projections of macros; where we can see the short term and long term outlook for inflation, growth, and unemployment. In this context, the recent speech delivered by Governor Adriana Kugler at the Economic Club of New York assumes significance.

The June Fed policy comes at a time when there have been persistent differences between the Fed chair and the President of the US over rate action. While Trump has demanded rate cuts, Jerome Powell has been less than willing. In her address, Adriana Kugler explains why the Fed stand to be cautious on rate cuts is justified; considering the macro situation.

PUTTING RISKS TO FED MONETARY POLICY IN CONTEXT

According to Adriana Kugler, there are 2 risks to the macroeconomy at this juncture. Firstly, the signals were slightly contrasting. For example, while tariff impact was starting to show on inflation, it was yet to show on jobs. The impact on GDP may be more due to the front ending of imports. Secondly, some tariff aspects had been factored into economic impact, but announcements like deportation of immigrants was yet to show on prices and growth.

The labour market has continued to be resilient at 4.2% unemployment. That is pretty close to full employment. However, GDP growth dipped into negative in the first quarter of 2025 and inflation is up by 10 bps in May from 2.3% to 2.4%. This is despite the fact that tariffs are only partially implemented and hence the impact of full tariff implementation could be steeper. The impact of immigration controls on prices and output, are yet to fully show up.

STRONG LABOUR MARKET VERSUS WEAK GDP GROWTH

One contrasting trend in the US economy has been the dichotomy between strong jobs and weak GDP data. Adriana Kugler has a valid explanation for this dichotomy. For instance, the rate of unemployment in the last 3 months between March 2025 and May 2025 has remained static at 4.2%, which is fairly close to the full employment target. However, the first and second estimate for Q1-2025 GDP growth stood at -0.3% and -0.2% respectively.

While the third and final estimate is awaited towards end of June, it is likely it will be a contraction. However, Kugler has justified this contraction on the grounds that the tariff fears had resulted in front-ending of imports which caused the GDP contraction. In April and May 2025, employers had added 1,77,000 jobs and 1,47,000 jobs respectively. This is more than what is required to sustain GDP growth, so jobs situation continues to be comfortable.

INFLATION REMAINS THE X-FACTOR FOR FEDERAL RESERVE

The Fed has a dual mandate of ensuring full employment and price stability. Ensuring price stability is about keeping inflation in control, so that the purchasing power of people is not compromised. While PCE inflation has come much closer to the targeted 2.0%, the CPI inflation is still some distance away. More importantly, the full impact of the tariffs has not yet showed up on inflation rate; so, inflation continues to be the X-factor.

In last few months, energy inflation and core inflation were subdued, but food inflation has been volatile. Tariffs on China and other food supplying nations could worsen the situation for the US in terms of spike in inflation. Adriana Kugler estimates that inflation could spike by 20-30 bps to a level of 2.6% to 2.7%. That is just considering the impact of tariffs and without the impact of immigration restrictions. That may still take time to show up.

WHAT DOES THIS MEAN FOR FED POLICY STANCE?

What does this macro matrix mean for Fed policy stance when the Fed announces its next policy on June 18, 2025? According to Adriana Kugler, “One reason for the resilience of the US economy in the last 2 years has been the persistent decline in inflation.” However, she expects that a combination of tariffs and immigration checks could push inflation higher.

For the US economy, there are upside risks to inflation and consequent downside risks to jobs and GDP growth. Hence, the best trade-off would be to maintain the current monetary stance, which is the best bet to maintain steady growth and temper inflation. Dovishness at this juncture, runs the risk of reducing the Fed’s options to deal with uncertain outcomes. We have to now wait for the actually policy statement in mid-June.