Fed Preview: What to Expect from the June 18 FOMC Meeting

When the Federal Reserve announces its policy decision on Wednesday, June 18 at 2:00 p.m. ET, followed by Chair Jerome Powell’s press conference at 2:30 p.m., investors should expect no change in interest rates—but that doesn’t mean this meeting is a non-event. With the federal funds rate widely expected to remain at the current range of 4.25% to 4.50% (CME Fed Fund Futures price in a 99% chance of no move), the focus will turn squarely to the updated Summary of Economic Projections (SEP) and the all-important dot plot. These will serve as the Fed's messaging tools to convey how recent economic shifts, including cooler inflation and shakier jobs data, might shape policy for the rest of 2025 and beyond.

Cooler Inflation, Softening Labor Market: Fueling Dovish Expectations

Recent data have offered the Fed some breathing room. May's CPI and PPI reports surprised to the downside, with core inflation trending lower and services inflation finally showing signs of moderation. Core PCE inflation—the Fed's preferred gauge—is expected to clock in around 2.5-2.6% in May, with the 3-month annualized rate falling close to 1.3%. Simultaneously, signs of labor market cooling have emerged. Weekly jobless claims have crept higher, the unemployment rate has ticked up to 4.2%, and wage growth appears to be decelerating.

These dynamics are shifting expectations. CME FedWatch data show that markets now price the first rate cut for September, with two total cuts expected in 2025. While Fed officials have been cautious not to validate this directly, the trajectory of the data suggests the central bank could be preparing for a dovish tilt.

Dot Plot and SEP: The Real Headlines

The dot plot and Summary of Economic Projections will be the focal point of the meeting. In March, the median projection for the 2025 year-end federal funds rate stood at 3.9%, signaling two 25bp cuts this year. If the June dot plot holds steady at that level, it confirms alignment with current market expectations. But any downward revision would be a dovish surprise.

Key updates expected in the SEP include:

• A downward revision to 2025 GDP growth from 1.7% to potentially as low as 1.0% due to the economic drag from tariffs.
• A modest increase in core PCE inflation for 2025 from 2.8% to possibly 3.0%.
• Steady unemployment rate projections, as weaker demand is offset by tighter labor supply due to immigration policies.

This update will be the Fed's attempt to reflect the growing tension between decelerating macro indicators and looming inflationary risks.

Tariff Turbulence: A Confounding Policy Factor

One of the largest wildcards remains the evolving tariff landscape. The Trump administration’s latest trade actions have already triggered a surge in customs duties collected, up $15 billion since February. While the immediate pass-through to consumer prices has been limited, analysts expect these effects to become more visible in the second half of the year. Tariffs typically represent a one-time jump in price levels, but if labor markets remain soft, the inflationary impulse could be muted.

Nevertheless, Powell and his colleagues must tread carefully. Any evidence that tariffs push core inflation higher while eroding margins and demand could tilt the risk calculus.

Trump and the Shadow Fed: Political Pressure Mounts

The Fed also faces increasing political heat. President Trump has sharply criticized Powell, labeling him a "numbskull" and has hinted at plans to install a "shadow" Fed chair to influence policy. Vice President Vance has echoed the sentiment, calling the Fed's restraint "monetary malpractice".

With rising interest payments on federal debt now outpacing spending on Medicare and defense, pressure is growing to cut rates not for macroeconomic reasons, but for fiscal sustainability. This raises uncomfortable questions about the Fed's independence and could stoke volatility if the central bank appears to waver.

The Risk of the "Sell America" Trade

Should the Fed bow to political pressure or overreact to short-term softness, it risks fueling the so-called "Sell America" trade. This scenario envisions capital outflows from U.S. assets, including Treasuries, due to perceptions of fiscal mismanagement and currency debasement. If the Fed cuts while long-term inflation expectations remain anchored, real rates could fall sharply, triggering dollar weakness. If expectations de-anchor, yields could spike, worsening the fiscal outlook.

Currently, the 10-year yield stands at 4.37%, with TIPS real yields at 2.09% and breakeven inflation at 2.28%. Any dovish surprise from Powell could pressure the dollar and spark volatility across asset classes.

Powell's Balancing Act

At his 2:30 p.m. press conference, Powell is likely to repeat a familiar refrain: the Fed is data-dependent, and both inflation and growth risks have risen. While he may acknowledge the improved inflation trend, he will likely stress the need for more evidence. Powell could reiterate that if inflation spikes again—due to tariffs or geopolitical tensions in the Middle East—the Fed is willing to hike further. Conversely, a labor market unraveling would justify rate cuts.

In essence, Powell will try to strike a neutral tone while subtly leaning dovish.

Market Implications: Mind the Dollar

The most immediate risk lies in currency markets. The dollar (DXY) is vulnerable, especially if the dot plot or Powell's tone signal a pivot toward easing. With global investors already uneasy about U.S. trade policy and debt sustainability, a surprise dovish shift could accelerate outflows.

Equity markets are priced for perfection, with the S&P 500 near record highs. Bonds remain rangebound. But the dollar could be the release valve.

Final Thoughts

The June Fed meeting won’t deliver a rate cut, but it could mark an inflection point in policy signaling. With inflation trending lower, labor markets softening, and tariff effects looming, the Fed has every reason to hold steady—but also to begin laying the groundwork for easing later this year. If Powell manages to maintain credibility while gently pivoting, the Fed could steer the economy through a minefield of political, economic, and geopolitical risks.

Markets would be wise to listen more to the dots than the doves.

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