The U.S. Federal Reserve left interest rates unchanged in June, as widely expected, but revisions to its economic projections indicate a more uncertain outlook. Fed officials made stagflationary revisions to their economic forecasts – with median forecasts for inflation and unemployment rising while growth forecasts dropped. Their outlook implies the two sides of their dual mandate (price stability and maximum employment) are moving in the wrong direction. Given this contradiction, projections showed Fed officials divided on the outlook for interest rates, with the majority split between keeping rates on hold or cutting 50 basis points (bps) by year end.
PIMCO’s outlook for the Fed similarly sees split potential paths ahead – with the Fed cutting gradually or not much at all if the labor market proves resilient, and cutting more significantly if the labor market weakens. Given recent employment data and rising uncertainty, our baseline forecast sees a return to a gradual pace of rate cuts later this year.
Volatile data and trade policy shifts alter forecast
Fed officials meaningfully revised their forecasts in June relative to March, reflecting more volatile economic data and significant changes to U.S. trade policy. Core inflation forecasts rose to “three-point-something” by year-end, up from the “two-point-something” median projection in March, despite generally cool and stable inflation data in recent months. Officials also lowered their 2025 median growth forecast to 1.4% from 1.7% in March, a notable drop from last year’s 2.5% rate.
Revisions to 2026 projections were smaller, suggesting officials view this year’s macroeconomic turbulence as at least somewhat transitory. The more modest shift in the 2026 and 2027 core inflation forecast suggests that Fed officials view tariff effects as a price level adjustment that will fade over time.
