In its latest economic projections, the U.S. Federal Reserve maintained expectations for two interest rate cuts in 2025, holding steady on its earlier forecast. However, it signaled growing concerns over a slowing economy as inflation and unemployment are now both projected to rise higher than previously anticipated.
Despite inflation gradually approaching the Fed’s 2% annual target, the Federal Open Market Committee (FOMC) opted to hold interest rates steady at 4.25%–4.50% during its June policy meeting. The decision reflects a cautious approach as officials weigh inflationary pressures against a still-resilient labor market.
“The summary forecasts that were published today imply that the FOMC sees a bit more stagflation than it did in March,” said Jay Bryson, Chief Economist at Wells Fargo. The term “stagflation” typically refers to the undesirable combination of stagnant growth and elevated inflation.
Unemployment, Inflation Forecasts Revised Upward
Projections released this week show unemployment expected to climb to 4.5% this year, up from the previously forecasted 4.4%. That’s also above May’s jobless rate of 4.2%. The Fed anticipates unemployment will hover around this level through 2026 and 2027. While not suggesting an imminent breakdown in the labor market, the higher jobless rate marks a shift in the Fed’s assessment of economic conditions.
“The Fed sees a good-enough-for-now labor market as ample justification to continue its wait-and-see approach,” said Cory Stahle, Senior Economist at Indeed. Policymakers appear to be counting on labor market stability to buy time to tame inflation.
On the inflation front, the U.S. Federal Reserve now sees the Personal Consumption Expenditures (PCE) inflation rate rising to 3% in 2025, up from the earlier 2.7% estimate. Projections for 2026 and 2027 also show inflation remaining above the central bank’s 2% goal. Analysts believe tariff-related price increases are influencing the Fed’s more cautious inflation outlook.
Kathy Bostjancic, Chief Economist at Nationwide, noted the central bank’s tone remains dovish despite the inflation uptick. “Their revised quarterly forecasts indicate they remain inclined to ‘look through’ a temporary spike in inflation and cut rates by 50 basis points this year,” she said.
Divided Views Within U.S. Federal Reserve on Interest Rate Path
The so-called “dot plot,” which shows individual U.S. Federal Reserve members’ expectations for interest rates, revealed a split among policymakers. Seven of the 19 FOMC members now expect no rate cuts in 2025, while eight project two cuts, aligning with the central forecast of a 0.5% reduction. The remaining four members predict different outcomes.
The increased number of officials expecting no rate cuts—up by three since March—suggests growing caution within the Fed despite positive economic signals like declining inflation and strong job growth.
“They don’t seem to be in a hurry to cut rates, but appear open to doing so under the right conditions,” said Bret Kenwell, U.S. Investment Analyst at eToro.
The updated projections underscore a delicate balancing act for the Fed as it navigates uncertain economic terrain marked by persistent inflation and a softening job market—hallmarks of potential stagflation.
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