The Federal Reserve (Fed) is expected to keep interest rates steady in its meeting next week, with investor focus shifting to new central bank projections, which are expected to provide further insight into the impact of trade and budget issues.
Inflation data this week has eased concerns regarding the impact of tariffs on prices. However, the latest monthly employment report showed slowing job growth, a combination that would generally push the Fed closer to resuming its interest rate cuts.
Trump demands full percentage point cut
Ahead of the central bank’s June 17-18 meeting, President Donald Trump demanded that the Fed lower its benchmark overnight interest rate by a full percentage point immediately, a move that would be considered dramatic with inflation remaining above the 2 percent target.
Since the Fed’s May policy meeting, the Trump administration has delayed its global tariffs until July. If implemented, this move could lead to both higher inflation and slower growth, central bank officials have previously voiced. In addition, trade tensions between the U.S. and China have eased but not been resolved, and the terms of a massive budget and tax bill under consideration in Congress are far from settled.
Recent Fed comments have reinforced a wait-and-see approach, with officials signaling little urgency to adjust policy amid increased uncertainty around the economic outlook. Despite lingering economic concerns and increasing caution, the Fed is still expected to cut interest rates twice this year.
According to the CME FedWatch tool, traders now expect the Fed to make a 25 basis point cut in September and October.
Inflation rises less than expected as labor market eases
This week’s data revealed that both consumer and producer prices rose less than anticipated in May. Although the year-over-year inflation rate—based on the Fed’s preferred measure, the Personal Consumption Expenditures (PCE) Price Index—remains about half a percentage point above the central bank’s 2 percent goal, recent figures indicate that core inflation, which excludes the more unpredictable food and energy prices, has averaged near 2 percent over the past three months.
At the same time, the unemployment rate has held steady at 4.2 percent for three consecutive months. The number of Americans filing new applications for unemployment benefits held at an eight-month high or 248,000 for the week ended June 7.  Nonfarm payrolls increased by 139,000 jobs in May, down from 193,000 a year ago.
Read: Fitch revises global sovereigns outlook to ‘deteriorating’ on tariffs, policy uncertainty
Recession odds decline to 30 percent
The Fed set its benchmark interest rate between 4.25 percent and 4.50 percent back in December, following a quarter-point cut aimed at initiating a gradual series of rate reductions in response to easing inflation.
However, trade policies implemented by Trump since his return to office on January 20 have heightened the risk of both increased inflation and slower economic growth. This development could force the Fed into a difficult position—having to choose between keeping inflation near its 2 percent target or prioritizing economic growth and maintaining low unemployment.
In its most recent analysis, Goldman Sachs analysts lowered the odds of a recession to around 30 percent and said they now see a less inflation and slightly higher growth this year. However, the analysis did not prompt a shift in the Fed rate outlook, which currently expects higher inflation numbers over the summer to sideline the central bank until December.
