Fed Rate Cut Hesitation: Why Traders Are Still Betting on June 2025

The Federal Reserve’s May 2025 decision to hold interest rates steady at 4.25%–4.50% underscored its growing caution amid a volatile economic backdrop. While traders have scaled back their bets on aggressive rate cuts this year, markets still price in a 60–75% probability of a June meeting easing, driven by a mix of weakening growth, modest disinflation, and geopolitical risks. This article explores the shifting calculus for investors, the Fed’s balancing act, and what lies ahead for monetary policy.

The Fed’s Dilemma: Inflation vs. Growth

The Fed’s May decision reflected a stark trade-off: easing inflation trends versus economic softness.

• Inflation: Core PCE inflation—the Fed’s preferred gauge—cooled to 2.6% year-over-year in March 2025, its lowest level since March 2021. This aligns with the central bank’s 2% target, but risks linger. President Trump’s tariffs, which have pushed import prices higher, threaten to reignite inflation. Analysts at RBC warn that tariff-driven price pressures could resurface as early as May, complicating the Fed’s path.

• Growth: The U.S. economy contracted by 0.3% annualized in Q1 2025, the first decline since 2022. The drag came from a 41.3% surge in imports as businesses pre-emptively stockpiled ahead of tariffs. While this distortion may reverse in Q2, economists now project GDP growth of just 1.7% for 2025, down from earlier estimates.

The June Cut: Data-Driven but Delicate

Despite these crosscurrents, traders remain focused on a June meeting for two key reasons:

1. Policy Momentum: The Fed’s March 2025 Summary of Economic Projections (SEP) already anticipated two rate cuts in 2025, with the first likely in June. This sets a baseline expectation.

2. Soft Data:

3. Consumer Spending: Growth slowed to 1.8% in Q1, the weakest since mid-2023, as inflation fears and job insecurity weighed on households.
4. Labor Market: Payrolls added 130,000 jobs in April, below expectations, with unemployment holding at 4.2%. While resilient, the Fed’s SEP now projects unemployment rising to 4.4% by year-end, signaling cooling demand.

However, Fed Chair Jerome Powell’s “wait-and-see” stance complicates matters. A June cut hinges on two data releases:
- May inflation reports (especially core PCE, due June 1).
- Q2 GDP data, which could show whether the Q1 contraction was a one-off or a trend.

Risks on the Horizon: Tariffs and Beyond

Traders are right to remain cautious. Three factors could upend the June cut narrative:

1. Tariff Volatility: Trump’s trade policies have distorted economic data, making it harder to discern true trends. A surge in core inflation (e.g., exceeding 2.8% y/y) would force the Fed to pause.

2. Global Spillover: Retaliatory tariffs from trade partners could disrupt supply chains, pushing up prices further.

3. Market Sentiment: Investors now assign a 40% probability of a U.S. recession within 12 months, per analysts. A sharp sell-off in bonds or equities could pressure the Fed to act sooner.

Conclusion: The June Window Remains Open—For Now

The Fed’s June meeting remains the likeliest window for a rate cut, supported by:
- A 0.3% GDP contraction in Q1, reinforcing growth risks.
- Core PCE at 2.6% y/y, within striking distance of 2%.
- Traders’ pricing of a ~60% probability of easing.

However, the Fed’s path is fragile. If May’s inflation data shows a rebound—or if tariffs push prices higher—the June cut could vanish. Investors should monitor two key indicators:
- Core PCE inflation for June (due July 1).
- Q2 GDP growth, which must rebound above 1% to avoid a prolonged slowdown.

For now, the Fed’s “wait-and-see” approach keeps markets guessing—but June remains the focal point.

In this environment, investors should prioritize defensive assets (e.g., Treasuries) while maintaining flexibility for a potential growth rebound. The Fed’s June decision will be pivotal—whether it eases or pauses, markets will recalibrate, and the path ahead will become clearer.