Introduction
At the June 2025 FOMC meeting, as the market expected, the federal funds rate target range remains unchanged at 4.25% to 4.50%, marking the fourth consecutive pause since January. At the same time, the Fed has also maintained the pace of balance sheet reduction that has slowed since April, continuing to reduce holdings of U.S. Treasuries and agency mortgage-backed securities (MBS), setting monthly redemption caps of $5 billion and $35 billion, respectively.
One of the most noteworthy changes in this meeting is the adjustment in tone regarding uncertainty in the economic outlook. The statement changed from 'uncertainty has further increased' to 'uncertainty has eased but remains high.' Chair Powell further pointed out, 'Uncertainty peaked in April but has recently eased, though it is still in a wait-and-see phase,' indicating that the Fed is adopting a cautiously optimistic attitude toward the economic outlook.
Additionally, the statement removed the previous explicit expression of 'the coexistence of unemployment and inflation risks,' emphasizing instead 'concern about the risks on both sides of its dual mandate.' This move reflects the recent stabilization of the unemployment rate at 4.2% and the notable slowdown in inflation, indicating a tempering of the committee's concerns regarding labor market and price pressures.
June FOMC Economic Forecast Summary
Economic growth forecast downgraded: The Fed significantly lowered its GDP growth forecast for 2025 from 1.7% in March to 1.4%, reflecting concerns that recent tariff hikes may stifle business investment and consumption. Nevertheless, Powell emphasized that the economy still exhibits a certain degree of resilience, maintaining a moderate expansion pace of 1.5% to 2% in the short term.
Inflation forecast significantly raised: The committee significantly raised its inflation forecast, adjusting the 2025 PCE inflation rate from 2.7% in March to 3.0%, and the core PCE inflation rate from 2.8% to 3.1%. This adjustment primarily reflects the expected impact of tariff policies on price levels. Powell clearly stated at the press conference that tariffs would raise prices and negatively impact economic activity. He noted that 'part of the cost of tariffs will be borne by American consumers and businesses,' contrasting with Trump's repeated claims that tariffs would hit other countries.
Unemployment rate forecast slightly adjusted: The 2025 unemployment rate forecast is raised from 4.4% in March to 4.5%. Although this adjustment is minor, it reflects the committee's concerns about a potential weakening labor market. The 2026 unemployment rate forecast is raised from 4.3% to 4.5%, indicating that the committee anticipates softening labor market conditions will persist for a longer period. The 2027 unemployment rate forecast has also been slightly raised from 4.3% to 4.4%.
Dot plot analysis
The latest dot plot released at the FOMC shows that the divergence among officials regarding future interest rate paths has significantly widened. The number of officials not expecting rate cuts in 2025 increased from 4 in March to 7, with the proportion rising from 21.1% to 36.8%, reflecting some committee members' ongoing vigilance regarding inflation stickiness and external risks. Nevertheless, the median forecast still indicates an expectation of two rate cuts over the year, totaling 50 basis points, showing a consensus on delaying but not canceling the cuts.
Furthermore, the interest rate forecasts for 2026 and 2027 are both revised upward, from 3.4% and 3.1% to 3.6% and 3.4%, respectively, indicating that the committee expects tightening policies to need to be maintained for a longer duration to suppress potential structural inflationary pressures. The long-term neutral interest rate remains unchanged at 3.0%, highlighting that the current policy setting is still relatively tight.
This adjustment in expectations has also impacted market pricing. The Fed Funds futures rate for December 2025 remains roughly stable at 3.90%, but larger divergences appear in the 2026 contracts, reflecting high uncertainty in the market regarding potential successors to Powell after his term ends. Some investors bet that if the new Federal Reserve Chair adopts a more dovish stance, rate cuts may come earlier, leading to fluctuations in long-term rate pricing.
FOMC Post-Meeting Press Conference
At this FOMC post-meeting press conference, Fed Chair Jerome Powell elaborated on the potential impact of the U.S. government's recent tariffs on imported goods on inflation and economic activity, emphasizing that price changes in the coming months will be one of the key factors in assessing monetary policy.
The U.S. government's imposition of tariffs on various imported goods will result in a short-term one-time price increase effect, as tariffs, as direct costs, will be immediately reflected in retail prices; at the same time, if businesses internalize the cost of tariffs in their long-term pricing strategies, it may lead to persistent price pressures. The sustainability of inflation depends on the ultimate transmission level of tariffs, the time required for price adjustments, and whether inflation expectations can remain stable.
He clearly pointed out that 'someone ultimately has to bear the cost of tariffs' and cited survey results indicating that most manufacturers expect to partially or fully pass the cost of tariffs onto consumers, meaning the ultimate burden will reflect on household and individual real expenditures and may further dampen consumption momentum. He further emphasized that the impact of tariffs on prices has a clear lagging characteristic: since retailers are currently selling inventory goods imported months ago, the new tariffs have not yet been fully reflected in prices, so related pressures will be transmitted to the consumer side in a gradually accumulating and delayed manner. He cited examples of certain consumer electronics products such as personal computers and audio-video equipment, which have already begun to rise in price, and expected that more products will face cost-pass-through effects in the coming months.
In terms of policy stance, Powell reiterated that the fundamentals of the U.S. economy remain resilient, with a strong labor market, but inflation levels are still above target. Coupled with rising external uncertainties from geopolitical risks in the Middle East, U.S. fiscal deficits, and trade policy variables, the Fed is inclined to maintain the current monetary policy. He stated that while rate cuts within 2025 remain the committee's consensus, there is no urgent need for action at present, and future decisions will be based on the latest data to achieve a balance between controlling inflation and maintaining economic stability.
In summary, Powell's remarks show a high level of vigilance: he is concerned about the subsequent impact of tariff pressures on inflation and consumption while emphasizing that policy making must be flexible to maintain space for potential delayed rate cuts in the second half of the year while responding to external policy risks.
Macro data tracking: Signs of cooling in the real economy are emerging simultaneously.
May retail sales (month-on-month): Published value -0.9%, lower than previous value -0.1% and forecast -0.5%.
May core retail sales (month-on-month): Published value -0.3%, lower than previous value 0.0% and forecast 0.2%.
The latest data from the U.S. Department of Commerce shows that total retail and food service sales in May decreased by 0.9%, significantly lower than the market expectation of -0.5%, marking the largest decline since December 2023. More notably, April's data was also revised down from +0.1% to -0.1%, indicating that consumption has contracted in real terms for two consecutive months. The year-on-year growth rate has also significantly slowed from +5.0% in April to +3.3%.
The more representative core retail sales (excluding automobiles) decreased by 0.3% month-on-month, far below the market expectation of +0.2%; if we further exclude automobile and fuel spending, the data also slightly declined by 0.1%, indicating that even after excluding volatile items, the consumer base is showing signs of real weakening. This suggests that American households are adjusting their spending behavior under the pressure of high interest rates and price stickiness, affecting not only durable goods but also spreading to daily consumption.
Although overall performance is weak, there are still structural highlights: online retail sales increased by 8.3% year-on-year, and food service increased by 5.3%, reflecting that consumers are gradually shifting from physical shopping to convenience and experience-oriented spending structures. However, this 'structural shift' is difficult to compensate for the broad weakness in overall retail, and the overall trend of weak domestic demand remains in place.
June Philadelphia Fed Manufacturing Index: Published value -4.0, same as the previous value -4.0 and below the forecast of -1.7%.
The June 2025 Philadelphia Fed Manufacturing Index report shows that manufacturing activity in the Mid-Atlantic region continues to weaken, with the main index holding steady at -4.0, remaining in contraction territory for the third consecutive month and significantly below the market expectation of -1.7, indicating that businesses remain cautious about the current economic and demand outlook. The Philadelphia area is a key industrial hub in the Northeast U.S., encompassing important industries such as chemicals, pharmaceuticals, machinery, and food processing, and its manufacturing climate serves as a leading indicator.
The most concerning data in this period is the significant drop in the employment index to -9.8, marking a new low since the pandemic outbreak in May 2020, highlighting that businesses have begun to adjust their workforce, reflecting that insufficient demand has turned into actual labor contraction. Although new orders and shipments indices have slightly rebounded, overall economic pressures have not fundamentally improved; the price paid and received indices have fallen from high levels, indicating some easing of upstream cost pressures, but they are still in a relatively high range. In terms of future outlook, the expected index has slightly rebounded, indicating that businesses still hold some hope for the second half of the year, but the expected rebound is limited, and attitudes remain cautious and conservative.
The U.S. plans to relax SLR regulations: Reshaping the liquidity of the U.S. bond market and strengthening the resilience of the financial system.
U.S. banking regulators recently proposed adjusting the Supplementary Leverage Ratio (SLR) and Enhanced Supplementary Leverage Ratio (eSLR) requirements, targeting the capital thresholds applicable to large banks, planning to lower the current 5% (3% basic requirement + 2% additional requirement) to a range of 3.5% to 4.5%. Although the market initially expected regulators might exclude U.S. Treasuries from SLR calculations, the regulatory body chose to reform by lowering the overall threshold instead.
Why is there a need to adjust SLR?
SLR is a non-risk-weighted capital requirement under the Basel Accord, requiring banks to hold minimum capital against their entire assets regardless of risk level. This design is intended to prevent banks from excessively expanding their balance sheets using low-risk assets to evade risk-weighted capital requirements. However, in the current environment, this system puts pressure on the liquidity and stability of financial markets.
In the past, under the intertwined backdrop of the Fed's rapid rate hikes, bank asset expansions, and surging U.S. Treasury supply, SLR has become a structural constraint limiting banks' ability to hold bonds. Large banks like JPM, GS, and Citi, among the G-SIBs, have been forced to reduce their participation in the U.S. Treasury and repo markets, leading to a lack of liquidity in the U.S. Treasury market, which should have high liquidity, further exacerbating volatility in financial markets.
The core of this reform lies in releasing bank capital space and restoring market intermediary functions. Lowering SLR and eSLR thresholds is equivalent to reducing the core capital required for banks to hold U.S. Treasuries, enabling banks to more actively take on Treasuries and participate in repo transactions.
For banks, this will:
Enhance their role as bond market makers, improving liquidity in the secondary market.
Increase the ability to participate in the repo market, enhancing overall capital allocation efficiency.
Reduce capital pressures while maintaining asset diversification and credit functions.
From a macro perspective and the logic of market transmission, lowering capital thresholds → banks' willingness to purchase bonds increases → demand for U.S. bonds strengthens → bond prices rise → yields fall. This transmission process is expected to stabilize medium- to long-term interest rates and ease the pressure of tightening financial conditions, providing critical support for continued bond issuance in a high-deficit environment.
For the U.S. economy, this reform helps reduce the crowding-out effect between monetary policy and fiscal policy; specifically, if bank capital is constrained from holding Treasuries, it may lead to rising financing costs for the private sector. Relaxing SLR would allow financial institutions to support Treasury issuance while still providing corporate loans and maintaining credit circulation without sacrificing bank robustness, further promoting economic expansion.
Overall, while the SLR reform is a regulatory tool adjustment, the underlying core logic reflects the dual goal of achieving financial market stability and macroeconomic support by enhancing banks' capacity to hold Treasuries and liquidity-supporting assets.