Washington, June 18 — The Federal Reserve is anticipated to maintain its current interest rates during the upcoming meeting on Wednesday. Policymakers are closely monitoring emerging signs of a cooling economy while balancing the potential risks of heightened inflation resulting from U.S. import tariffs and the intensifying crisis in the Middle East.
As tensions escalate, missile strikes between Israel and Iran have continued for a sixth consecutive day. President Donald Trump has hinted at possible U.S. involvement, while Iran's Supreme Leader, Ayatollah Ali Khamenei, has issued warnings against such actions. Despite the intensity of the conflict, the price of oil has only increased by about 10% to approximately $77 per barrel, which remains significantly lower than the $120 peak observed following Russia's invasion of Ukraine in 2022, a shock that had widespread implications across various commodity markets and influenced the Fed's decisions on interest rates.
Goldman Sachs analysts have noted that while oil prices are expected to stabilize in the upcoming months under normal circumstances, they could potentially surge past $100 per barrel in extreme scenarios involving disruptions to regional oil production or shipping. Historical precedents, such as the oil shocks of the 1970s, remind us that such crises can lead to significant inflation, and although the U.S. is now a net oil exporter, a sustained global price shock could introduce further volatility and uncertainty for the Federal Reserve.
Since establishing the benchmark interest rate within the current range of 4.25%-4.50% in December, the Fed has observed a murky economic outlook, particularly after President Trump returned to power in January and swiftly revamped U.S. trade policy by imposing significantly higher tariffs on imported goods. Although many tariffs have been postponed, unresolved issues continue to loom large, posing a potential source of increased inflation that is on the radar of U.S. central bank officials.
Recent data regarding the job market, retail sales, and other facets of the U.S. economy indicate that growth may be weakening. While U.S. jobless claims have declined over the past week, indicating that companies are hesitant to lay off workers, the month-to-month growth in employment has begun to slow. Notably, data released on Wednesday revealed troubling trends in the housing sector, with housing starts plummeting nearly 10% in May to their lowest level since the early stages of the COVID-19 pandemic in 2020. Furthermore, permits saw a decline of 2.0%, signaling a future supply shortage.
For Federal Reserve officials, this evolving landscape means they will likely be in a prolonged wait for the clarity needed to guide their decisions on interest rates. A recent survey from the National Association for Business Economics depicted a stagflationary scenario, predicting that GDP growth will slow to 1.3% in 2025, down from the 1.9% projected in early April. Inflation is expected to end the year at 3.1%, a percentage point higher than the previous reading and significantly above the Fed's 2% target. Economists forecast that the unemployment rate, which stood at 4.2% in May, will rise slightly to 4.3% by the end of the year and then increase steadily to 4.7% by early 2026.
With risks to both inflation and employment goals, coupled with uncertainties surrounding Trump's policy agenda, investors are bracing for the central bank to remain steady for potentially several months, with no further rate cuts expected until September. Trump has been vocal about his demand for an immediate reduction in borrowing costs, having previously seen the Fed implement three rate cuts in 2024.
The Fed's cautious stance appears to reflect a hesitation stemming from Trump's unpredictability. Central bankers are inherently conservative, and with the dual risks to their mandates, the prevailing approach is to adopt a wait-and-see strategy, observing how the next few months will clarify their dilemma. Dario Perkins, an economist at TS Lombard, highlighted this sentiment in his analysis of the Fed's position amid current economic data and Trump's expectations.
The Federal Reserve is set to release its policy statement along with updated economic and interest rate projections at 2 p.m. EDT (1800 GMT) following the conclusion of its two-day meeting. Fed Chair Jerome Powell will hold a press conference shortly thereafter. Michael Feroli, chief U.S. economist at JP Morgan, indicated that he does not expect significant changes in the policy statement, given the robust recent job growth, persistent inflation above the Fed's target, and heightened uncertainty. However, policymakers' projections will offer an updated outlook on expected economic developments and how monetary policy may need to adapt in the coming months. The last round of projections in March suggested that the Fed anticipated implementing two quarter-percentage-point rate cuts by the end of 2025, aligning with current market expectations.
