Fed Holds Rates Steady as Economic Uncertainty Persists

On June 18, 2025, the Federal Reserve announced its decision to hold the federal funds target range at 4.25%–4.50%, marking the fourth consecutive meeting with no change since December 19, 2024. Market participants had broadly anticipated this outcome, with current pricing suggesting the earliest potential rate cut may come in September. The outlook remains tied to how the economy responds once the 90-day pause on tariffs ends and decisions are finalized on which tariffs will be implemented or removed.

Inflation has continued to show an uneven downward trend. Headline CPI rose slightly from 2.3% in April to 2.4% in May, a smaller increase than expected by economists. Meanwhile, the labour market has remained stable. The unemployment rate held steady at 4.2% for the third consecutive month, supported by job gains in health care, leisure, and hospitality. Federal government employment declined during the same period. Although hiring has been concentrated in a few sectors, overall employment conditions remain strong enough to support domestic demand.

Source: FRED: Data from 01/01/1960 – 04/29/2025

Despite these signs of resilience, broader economic activity has slowed. Real GDP contracted by 0.2% in the first quarter of 2025, following a 2.4% increase in the fourth quarter of 2024. The pullback was driven by a rise in imports, slower consumer spending, and a decline in government expenditures, partially offset by gains in private investment and exports. While it does not indicate a recession, it adds to the uncertainty around the outlook and highlights the need for the Fed to monitor how their policy and trade frictions are affecting growth.

Source: U.S. Bureau of Economic Analysis - US Gross Domestic Product, 1st Quarter 2025 (Second Estimate)

Source: Congressional Budget Office - The Budget and Economic Outlook: 2025 to 2035

Trade policy remains a key area of focus. The 90-day Tariff Pause, which began on April 9, 2025, is scheduled to expire on July 8. During the pause, a 10% tariff has continued to apply to most U.S. imports. However, imports from China and Hong Kong are currently subject to a 30% tariff, following a temporary reduction from the previous 145% rate as part of a 90-day trade agreement effective May 14, 2025. Legal challenges have also emerged: U.S. courts have ruled that several of the tariffs introduced under the International Emergency Economic Powers Act exceeded presidential authority. These decisions are currently under appeal, and the tariffs remain in place pending final rulings. The outcome of these cases could influence both trade flows and inflation expectations in the coming months.

Alongside monetary and trade policy developments, fiscal dynamics are drawing increased attention. The Congressional Budget Office projects a $1.9 trillion federal budget deficit for fiscal year 2025. As of the end of fiscal 2024, federal debt stood at approximately $36.56 trillion. That figure is expected to surpass $38 trillion this year, bringing the debt-to-GDP ratio to roughly 99.9%. In response, the House passed the “One Big Beautiful Bill Act,” which proposes raising the debt ceiling by $4 trillion and extending the 2017 tax cuts. The bill’s passage in the Senate remains uncertain, as concerns over long-term debt sustainability persist among some legislators.

Total Federal Debt - Source: US Government Financial Statements

Looking ahead, Bloomberg’s WIRP indicates a 14.9% probability of a rate cut at the Fed’s next meeting on July 30. This is similar to expectations in Canada, where the market is assigning a 28.3% chance of a cut. For now, policymakers continue to signal patience, with upcoming data on inflation, growth, and employment likely to determine whether a shift in policy occurs later this year or if rates remain on hold.

World Interest Rate Probability - Source: Bloomberg - June 18, 2025

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