US: Fed pause and staying on the sidelines. Fed Chair Jerome Powell said that higher tariff expectations have made the Fed more wary of continued rate cuts, but he also ruled out a rate hike, holding rates steady at 4.5% as widely expected. Powell noted that higher energy prices from the Middle East tensions do not last. The Fed appeared to place more emphasis on the labour market for a rate cut; it lifted the 2025 unemployment rate forecast to 4.5% from 4.4%.

The Summary of Economic Projections leaned toward stagflation. The Fed lowered its 2025 forecast for real GDP growth to 1.4% from the 1.7% projected in March and lifted those for PCE inflation to 3% from 2.7% and core PCE inflation to 3.1% from 2.8%. Despite the softer-than-expected US CPI inflation released on 11 June, the Fed expects more goods inflation this summer from many companies passing the tariffs to consumers. Until it gets more clarity on the size, amount, and duration of the tariffs, the Fed will remain vigilant about preventing any one-time inflation from becoming entrenched.

The Fed kept the dot plot to two cuts for this year but reduced the subsequent two years by one cut each. Note that given the higher inflation expectation, two cuts for 2025 should be seen as dovish. The projections for 2026 and 2027 look hawkish. Note that even in 2027, the Fed would not be back at its own estimate of neutral (kept unchanged at 3%. There is also a notable split among Fed officials (seven indicating no cuts for the year and eight indicating two cuts).

Powell will likely repeat the Fed’s patient stance when he testifies before the Senate Banking Committee next week on 25 June. Until then, US President Donald Trump will likely demonstrate his displeasure over the Fed brushing aside his latest call for a 100 bps cut.

President Trump is keeping everyone guessing about US military involvement despite classic indications of preparation – moving an aircraft carrier, bombers, and tanker planes into position. Russia and China were clearly against US escalation with the former offering to mediate and the latter issuing stern diplomatic warnings, while avoiding direct invention.

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