This week, Federal Reserve officials maintained their current interest rate expectations but revised their economic outlook in significant ways. According to the latest economic projections from the Federal Reserve Open Markets Committee (FOMC), the central bank is likely to implement two more interest rate cuts, equating to a reduction of half a percentage point, before the end of the year. These projections align closely with forecasts made in March and late last year, indicating a consistent trajectory.
However, the latest Fed forecast reveals important changes compared to previous projections. Officials now anticipate a rise in both unemployment and inflation rates, surpassing their earlier predictions. This adjustment underscores the rationale behind the Fed's cautious wait-and-see approach. Despite the inflation rate inching closer to the annual target of 2%, the Federal Reserve opted to keep rates steady at their current level of 4.25% to 4.50% during their recent meeting.
Recent forecasts indicate a more pessimistic outlook for the unemployment rate. More officials are predicting an increase in unemployment, with most projections now suggesting a rate between 4.4% and 4.5% for the current year. This has raised the median projection to 4.5%. Data from May shows that the unemployment rate remained at 4.2%, but officials expect it to stabilize around 4.5% in 2026 and 2027, which is an upward revision from earlier estimates.
Despite these revised forecasts, officials do not foresee a significant breakdown in the labor market. The current strength of the labor market allows the Federal Reserve to maintain higher interest rates, aimed at guiding the Personal Consumption Expenditures (PCE) inflation rate back to its 2% target. Indeed Senior Economist Cory Stahle noted, “From the Fed’s perspective, substantial ongoing uncertainty paired with a good-enough-for-now labor market is ample justification to continue its wait-and-see approach.”
The outlook for PCE inflation is less optimistic, with officials now anticipating the median PCE inflation rate to rise to 3% by 2025—up from the previously estimated 2.7% in March. Projections for inflation in 2026 and 2027 are also higher than before, indicating that officials expect inflation to remain above the Fed's target of 2% for a longer duration. This shift suggests that officials may be accounting for anticipated price increases due to tariffs, which could contribute to prolonged inflationary pressures.
Even with these revised inflation projections, the Fed has chosen not to significantly alter their interest rate outlook. Nationwide Chief Economist Kathy Bostjancic commented, “Their revised quarterly forecasts indicate they remain dovish and inclined to ‘look-through’ a temporary spike in inflation and cut interest rates by 50 basis points this year to support an anticipated weakening in economic activity.”
The latest dot plot from the FOMC reveals a divide among its members regarding the future of interest rates. Seven out of 19 members believe rates will remain unchanged at 4.25% to 4.5% for the rest of the year. In contrast, eight members project that the Fed will lower interest rates two more times, bringing them down to a range of 3.75% to 4%. Only four members have a differing view.
Overall, these projections suggest a cautious approach among FOMC members regarding the need for interest rate cuts. The dot plot indicates an increase in the number of members who believe that the Fed will not implement any cuts this year, while fewer anticipate a 50 basis points reduction compared to earlier forecasts in March. “They don’t seem to be in a hurry to cut rates but appear open to doing so under the right conditions,” said eToro U.S. Investment Analyst Bret Kenwell.
In conclusion, as the Federal Reserve navigates through complex economic indicators, including unemployment and inflation rates, their cautious stance reflects a careful balancing act aimed at sustaining economic growth while achieving their inflation targets.
