Wait and See.
We anticipate the July 2025 FOMC meeting outcome will reflect a “wait and see” stance. Recent data continue to be mixed: no clear deceleration of the labor market and some pick up in inflation, making signals difficult to discern. The full effects of the tariff shock is yet to materialize. The models suggest that both sides of the Fed mandate will be under stress going forward, but it remains unclear which will dominate and the extent of the damages. The FF rate is projected to go sideways for the time being in the models.
In short, we believe the FOMC is unlikely to commit strongly in either direction until it becomes clear which issue (growth or inflation) dominates. Thus, the policy stance will likely remain cautious—”Wait and See.” We expect Powell to take time and defer all decisions to the September meeting.
Main points:
- Recent data have been roughly in line with the Fed staff’s forecast implied by the latest FOMC minutes. There has been no improvement in the distribution of price changes, which continues to be inconsistent with the inflation target. The common component across items suggest that tariffs-related effects have started to materialize in the data. We expect them to continue in the near-term.
Figure 1. Core CPI MoM prices change distributions.
- The medium-term forecast is little changed; pi* remains higher than target. Compared to the previous projection, the medium-term model-based forecast is little changed, as the incoming data confirmed the model’s own forecast. The estimate for pi* remains around 2½%.
Figure 2. Current and previous FOMC round “main” model forecast of core PCE price inflation.
- The estimate of “underlying inflation” (pi*) remains higher than target. According to our models, pi* is at 2.6 percent. Pi* is very persistent by nature and remains above the Fed target.
Figure 3. Evolution of the estimate of pi*.
Path of the Federal Funds (FF) rates. Assuming that core PCE reaccelerates this year, and the unemployment rate ticks up, inertial, non-inertial Taylor rules, and the FRB-US model suggest that the Fed is “on hold” until it becomes clear which side of the mandate dominates.
Figure 4. FRB-US model forecast
Note: red-dashed lines = model forecast, blue dots = June SEP.
As usual, we would be more than happy to schedule a meeting to discuss the details.