From the Desk of AgFi’s Business Strategist Published 6/18/25 – The Federal Reserve’s (Fed’s) Federal Open Market Committee (FOMC) made no change to short-term interest rates today, as expected. The market for longer-term rates has shown virtually no reaction.
The FOMC kept the Fed funds rate (the rate at which banks lend to each other overnight and set short-term borrowing rates) at 4.5%, leaving Prime Rate at 7.5% while longer-term rates have held nearly constant. This decision was widely expected and perhaps not as important as expectations for the future.
The Fed’s statement included a projection that there will be two more Fed funds rate cuts in 2025, the same as previously projected. But the Fed raised their assumption for inflation, as shown in the core PCE (Personal Consumption Expenditures excluding food and energy) their preferred inflation measure, to 3.1% in 2025. That is up from the current level of 2.5% and higher than their previous projection of 2.8%.
Further, the Fed projected that GDP would grow 1.4% in 2025 compared to their previous forecast of 1.7% growth. In the first quarter of 2025 GDP fell 0.2% but the current Atlanta Fed projection for the second quarter is growth of 3.6%.
The combination of these projections makes it clear that the Fed expects slow growth and rising inflation. Sometimes that is called Stagflation. The reason for this projection is primarily the Fed’s belief that impending tariffs will cause higher prices and will slow down the economy.
That belief has been stated many times in the last several months, however those effects have not come to fruition, at least not yet. The core CPE has declined since the beginning of the year from 3.2% year over year in January to 2.5% in May. But the Fed believes that tariffs will lead to inflation later in the year as do consumers, as shown in recent surveys.
The additional assumption is that the economy will slow. However, as shown in the Atlanta Fed projection the recent data suggests stronger growth in the second quarter.
The Fed wants to be certain not to contribute to inflation by lowering short-term rates that would stimulate the economy, investment and borrowing. They would rather wait to see clearer evidence of the tariff effect.
The core belief underlying the Fed’s projection is that tariffs will be passed to consumers. However, that is a narrow interpretation that everything in the supply chain will remain constant and that increased tariff costs will be passed on to consumers. That is very unlikely and not supported by the current data.
There is a line of suppliers that provide products to consumers, including manufacturers, wholesalers, shippers and retailers. All the providers can and, almost certainly will, participate in the absorption of higher costs. And consumers can choose to purchase alternative products. This effect is already showing in the May decrease of more than 15% in imports. That means that alternative purchases are being made and exporters will reduce prices.
If the Fed is right that inflation will increase and the economy will slow then their projected gradual rate reduction is likely. But if inflation continues to moderate and the economy grows moderately then the Fed will likely lower short-term rates more rapidly and long-term rates will likely fall but, as is normally the case, not as rapidly.