To The Moon

At its June policy meeting, the Federal Reserve kept its benchmark interest rate unchanged in the 4.25%-4.50% range for the fourth consecutive time. While this move was widely expected by markets, it masked deepening internal divisions among policymakers. The latest dot plot and economic projections reveal a fragmented Fed—caught between persistent inflation, labor market uncertainties, and external policy shocks, making the path forward for monetary policy more complex than ever.

A Fragmented Dot Plot and Policy Dilemma

A close analysis of the dot plot reveals a surprisingly scattered outlook for 2025 interest rates among the 19 Fed officials. Seven now believe there should be no rate cuts next year—an increase from three months ago—signaling a growing hawkish faction. Although those favoring cuts remain the majority, they too are divided: two call for a modest 25 basis point reduction, eight support a 50-basis-point cut, and two advocate for a more aggressive 75-basis-point cut. This wide divergence mirrors Chair Jerome Powell’s admission that “no one is very confident about the path of interest rates,” underscoring the policy challenges amid today's uncertain economic landscape.

Source: Summary of Economic Projections, Federal Reserve Board

Dual Pressures from Inflation and Labor Market

The Fed is facing serious tests on both legs of its dual mandate. On inflation, the latest projections raised the core PCE inflation forecast for the end of 2025 to 3.1%, highlighting the stubborn nature of price pressures. Powell stressed that recently imposed tariffs could continue to push prices higher over the coming months, warning that the inflationary impact is far from “one-off.”

Meanwhile, the labor market, while appearing robust on the surface, is showing signs of strain. Job vacancies are declining, employment growth is slowing, and long-term unemployment claims have risen to a three-year high—early indicators that warrant concern. The Fed’s downward revision of 2025 GDP growth—from 1.8% to 1.4%—further reflects a growing unease about economic momentum.

Source: U.S. Bureau of Statistics

Trade Policy Adds to the Uncertainty

The tariff policies introduced by the Trump administration add a layer of complexity to the Fed’s decisions. Though May inflation data showed a temporary easing, the Fed has warned that the full impact of tariffs may be delayed. For now, the inflationary effect appears mild, with falling energy prices offsetting upward pressure. However, the broader economic impact—manifested in corporate margin compression and slowing growth—is becoming harder to ignore. Adding to the Fed’s tightrope walk is mounting political pressure, as Trump escalates calls for aggressive rate cuts to ease the national debt burden—moves that challenge the Fed’s independence and risk politicizing monetary policy.

A Delicate Balance in a Wait-and-See Approach

By standing pat, the Fed is essentially trying to strike a delicate balance between the risk of reigniting inflation and the danger of tipping the economy into recession. On one hand, premature rate cuts could mirror the policy missteps of the 1970s and undermine hard-won progress on inflation. On the other, holding rates too high for too long—especially as tariffs bite—could accelerate economic decline. Interestingly, financial conditions remain relatively loose: corporate borrowing costs are low, and equity markets hover near record highs. This apparent disconnect may help explain the Fed’s current resolve.

Key Variables for the Path Ahead

Looking into the second half of the year, whether the Fed begins to ease will depend on two critical factors. First is the labor market—if unemployment continues to rise or wage growth slows significantly, the case for cuts will strengthen. Second is the inflation trajectory; core PCE must show sustained progress toward the 2% target. Some analysts expect the Fed to pivot toward easing by the end of Q3 as the economic drag from tariffs intensifies. However, this outlook is clouded by major uncertainties—escalating tensions in the Middle East could fuel volatile energy prices, and the looming U.S. election season adds further policy unpredictability, both of which may force the Fed to reassess its stance.

Technical Analysis

The policy uncertainty and the Fed’s wait-and-see approach are clearly reflected in market movements, with major indexes and the U.S. dollar remaining in choppy, range-bound patterns:

• Dollar Index (DXY) initially fell 20 points after the rate decision but rebounded during Powell’s press conference to close higher. After finding support near 97.7, the index has risen for three consecutive days and may soon test the key 100 level. However, repeated failures to hold above 100 suggest the index remains under pressure below that threshold.

• Dow Jones $Dow Jones(.DJI)$ reversed all intraday gains post-conference and formed a bearish candle on the daily chart. It remains in a downward consolidation phase and is nearing its monthly low. A confirmed break below that level would signal a bearish trend.

• S&P 500 $S&P 500(.SPX)$ mirrored the Dow’s move, giving up gains and closing with a reversal candle. Like the Dow, the S&P remains in a downtrend and risks testing last week’s low. With the index still near all-time highs, caution is warranted for bulls.

• Nasdaq $NASDAQ(.IXIC)$ also erased intraday gains and closed with a doji candlestick. While relatively more resilient, it still risks a retest of this week’s starting point, and remains in a downward consolidation pattern. The 22,000 level serves as a resistance zone, reinforcing the need for caution.

Invesight Viewpoint

This rate decision marks a turning point for the Fed as it enters an increasingly complex phase of monetary policy. The fragmented dot plot underscores not only the economic uncertainty but also the limitations of conventional policy frameworks in the face of multiple external shocks. Powell and his team are striving to balance data dependence with policy foresight, but the politicized environment and ever-shifting risk landscape make that balance increasingly precarious.

Ultimately, the Fed’s next steps may hinge on a more fundamental question: In the tug-of-war between inflation and growth, which side will crack first? On that, even the Fed’s most seasoned officials seem far from certain.