Weekly Update 06/20/2025: Fed Holds Rates Steady; Continues To Signal Two Rate Cuts This Year
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Domestic Economic News
Relative calm returned to global markets in Monday trading, with stocks climbing and oil sinking alongside gold as fears subsided that Israel’s war against Iran would escalate into a wider conflict. Equities extended gains on news reports Tehran is signaling it wants to restart talks over nuclear programs. Equities bounced after Friday’s slide. West Texas Intermediate crude slid 1.5%, erasing an earlier rally. The Treasury sold $13 billion in 20-year bonds at 4.942% on Monday, matching the yield around the sale deadline. President Donald Trump said Iran wants to talk about de-escalating the conflict with Israel even as the two sides exchanged deadly fire for the fourth straight day. Asked if the US would get more involved militarily, Trump said he didn’t want to discuss it. Tehran is signaling it wants to de-escalate hostilities with Israel and is willing to resume nuclear talks with the US as long as Washington doesn’t join the Israeli attacks, the Wall Street Journal reported Monday citing Middle Eastern and European officials it didn’t identify. A similar report by Reuters says Iran conveyed the message through Qatar, Saudi Arabia and Oman. The outbreak of hostilities between Israel and Iran disrupted the momentum that had driven the S&P 500 back near record levels. While markets initially adopted a cautious, risk-off stance to assess how the conflict might unfold, sentiment improved on Monday as investors speculated the attacks were unlikely to draw in more parties. “Focus will remain on geopolitical headlines, but as long as the conflict stays limited between Israel and Iran, it’s unlikely to materially impact the markets,” said Tom Essaye at The Sevens Report.
US retail sales fell for a second straight month in May, suggesting anxiety over tariffs and their finances prompted consumers to pull back after an early-year spending rush. The value of retail purchases, not adjusted for inflation, decreased 0.9%, the most since the start of the year and restrained by autos, Commerce Department data showed Tuesday. That followed a downwardly revised 0.1% drop in April, marking the first back-to-back decline since the end of 2023. Seven of the report’s 13 categories posted declines, dragged down by building materials, gasoline and motor vehicles — which came after a buying spree in anticipation of tariffs. Spending at restaurants and bars, the only service-sector category in the retail report, fell by the most since early 2023. After loading up on purchases for cars and other goods to front-run President Donald Trump’s tariffs, the figures suggest consumers are now pulling back spending. While the duties so far haven’t boosted US inflation, consumer sentiment is still shaky and household finances have worsened amid a persistent rise in the cost of living and high interest rates. While the administration made a trade deal with China this month and talks continue with other countries, Trump said last week he may raise US auto tariffs “in the not too distant future” and is looking to set unilateral tariff rates in the coming weeks. A poll conducted for Bloomberg News last month showed three in five respondents reported cutting back due to concerns around a potential recession, largely on services like dining out and entertainment.
US industrial production declined in May for the second time in three months, reflecting weaker utility output and soft manufacturing. The 0.2% decrease in production at factories, mines and utilities followed a revised 0.1% gain a month earlier, Federal Reserve data showed Tuesday. The median estimate of Bloomberg survey of economists called for no change. Manufacturing output edged up 0.1% after a bigger drop in the previous month than initially reported. Production at utilities declined 2.9%, while mining and energy extraction was slightly higher.
Applications for US unemployment benefits ticked down last week, stabilizing near the highest levels in eight months. Initial claims decreased by 5,000 to 245,000 in the week ended June 14, in line with the median forecast in a Bloomberg survey of economists. Continuing claims, a proxy for the number of people receiving benefits, also fell slightly, to 1.95 million, in the previous week, according to Labor Department data released Wednesday. Data tend to be volatile, especially around holidays or when schools are on summer vacation. Overall, jobless claims have risen in the past two months, reflecting a gradual slowdown in the labor market. Hiring has moderated and recurring claims are hovering near the highest since the end of 2021, indicating that it is taking longer for unemployed people to find a new job. Here is what Bloomberg Economics had to say: “Signs of softening are more evident in continuing claims, which have been trending higher. The current labor market environment is not about mass layoffs but rather fewer job openings, fewer new hires, and longer unemployment.” —Eliza Winger
New US residential construction declined in May to the slowest pace since the onset of the pandemic as an elevated inventory of homes for sale and high mortgage rates sapped the motivation to build. Housing starts decreased 9.8% to an annualized rate of 1.26 million homes last month, according to government figures released Wednesday. The median projection in a Bloomberg survey of economists was for a 1.35 million pace. Multifamily starts declined nearly 30% from one of the strongest paces since 2023. New single-family home construction edged up to a 924,000 rate after a downward revision to the prior month. The number of building permits issued in May fell to an annualized rate of 1.39 million, also a five-year low. Authorizations for the construction of single-family homes decreased to the slowest pace since April 2023. The report illustrates subdued home construction activity as builders face a number of headwinds, including inventories of completed houses that stand at the highest level since 2009. Years of price appreciation and elevated home financing costs are working to restrain demand, prompting homebuilders to sweeten incentives. Last week, the 30-year fixed mortgage rate stood at 6.84%, according to the Mortgage Bankers Association. Many economists see residential construction struggling to contribute to economic growth over the course of the year.
Interest Rate Insight and the Fed
Federal Reserve officials left interest rates unchanged and continued to pencil in two rate cuts in 2025, saying uncertainty over the economic outlook was still high but had diminished. The Federal Open Market Committee voted unanimously on Wednesday to hold the benchmark federal funds rate in a range of 4.25%-4.5%, as they have at each of their meetings this year. Officials also downgraded their estimates for economic growth this year while lifting their forecasts for unemployment and inflation. Speaking to reporters following the decision, Chair Jerome Powell repeated his view that the central bank was “well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.” While the median expectation for two rate cuts in 2025 didn’t change, a number of officials lowered their projections. Seven officials now foresee no rate cuts this year, compared with four in March. Two others pointed to one cut this year. The shift in projections appeared to show a wider divide among policymakers over the likely direction of rates, at least in 2025. Asked about the division, Powell downplayed the projections. Given the high level of uncertainty in the economy, he said, “No one holds these rate paths with a lot of conviction.” Officials added in their post-meeting statement, “Uncertainty about the economic outlook has diminished but remains elevated.”
The dollar and Treasury yields remained lower, while the S&P 500 held gains after the announcement, although those gains had faded by the end of the trading day. Traders priced in a 74% probability that the Fed will lower rates by September, compared with 66% prior to the meeting. About two cuts were priced in by year-end. Policymakers dropped a line from the previous statement that said risks to both unemployment and inflation had risen. In the run-up to this month’s meeting, many officials signaled their preference to hold rates steady for some time as they wait for clarity on how President Donald Trump’s economic policies will affect the trajectory of inflation and the broader economy. Fed officials and economists broadly expect the administration’s expanded use of tariffs to weigh on economic activity and put upward pressure on inflation. The rate outlook from officials was in line with investors’ expectations for cuts this year prior to the announcement.
Policymakers on Wednesday also issued updated quarterly rate projections and economic forecasts, the first since Trump unveiled sweeping tariffs on US trading partners — many of which he has since pared back or delayed. Officials raised their median estimate for inflation at the end of 2025 to 3% from 2.7%. They marked down their forecast for economic growth in 2025 to 1.4% from 1.7%. They forecast an unemployment rate of 4.5% by the end of the year, up slightly from their previous estimate. The projections reflect the thorny situation facing Fed policymakers. Growing inflationary pressures typically suggest the Fed policy should restrain the economy with elevated rates, while weakening growth calls for stimulus through lower rates.
Federal Reserve Governor Christopher Waller said the central bank can lower interest rates as soon as next month. “We could do this as early as July,” Waller said Friday in an interview on CNBC. The Federal Open Market Committee next meets July 29-30 in Washington. “I think we’ve got room to bring it down, and then we can kind of see what happens with inflation,” he said, adding the central bank could pause cuts if needed. Waller’s comments follow the decision by Fed policymakers on Wednesday to keep interest rates on hold. Officials also continued to signal their expectation for two rate cuts before the end of 2025, according to their median projection. Seven policymakers signaled they expect no cuts this year, pointing to an apparent split in the committee.
Impactful International News
China’s unexpectedly strong retail sales in May gave the economy some relief from US tariffs, although the momentum may not last as deflationary forces persist and a housing market slump shows signs of deepening. Retail sales grew 6.4% last month, the fastest pace since December 2023 and exceeding all estimates. That contrasted with a mild slowdown in industrial output and fixed-asset investment, as Donald Trump’s tariffs hurt overseas demand. The official data released Monday positions China for solid growth in the second quarter at around 5%, which is the official target for the year. That gives Beijing more breathing room as it copes with Trump’s trade war, while potentially delaying broad stimulus measures. The risk is that retail sales may pull back as temporary tailwinds fade. An earlier-than-usual online shopping festival in May, for instance, could cannibalize June sales. A gloomy job market and worsening home prices will likely continue to push households toward saving over spending. “For a more sustainable recovery, we hope to see consumer sentiment recover more in the coming months,” said Lynn Song, chief economist for Greater China at ING Groep NV. “But this may remain challenging as the property price decline worsened on the month and a cost cutting environment remains.” The onshore CSI 300 Index ended Monday 0.3% higher, while a gauge of Chinese stocks listed in Hong Kong gained as much as 1.2%. The data showed the following: retail sales expanded 6.4% in May, accelerating from 5.1% in April; industrial output grew 5.8%, slower than the 6.1% gain in April; fixed-asset investment expanded 3.7% in the first five months, moderating from 4% in the Jan.-Apr. period; and the jobless rate improved slightly to 5% from 5.1% in April. Retail sales benefited from the so-called 618 annual shopping festival that typically starts at the end of May. A similar early shopping season also boosted receipts in October, but the bump turned out to be short-lived as November figures slowed.
Investor confidence in Germany’s economy improved more than anticipated as a forthcoming surge in public spending outweighs fears over looming US tariffs. An expectations index by the ZEW institute increased to 47.5 in June from 25.2. the previous month. That’s way above the 35 median estimate in a Bloomberg survey. A measure of current conditions also gained. The outcome “seems to strengthen the assessment that the fiscal policy measures announced by the new German government can provide a boost to the economy,” ZEW President Achim Wambach said Tuesday in a statement. “Combined with the recent interest-rate cuts by the European Central Bank, this could bring economic stagnation in Germany, which has lasted for almost three years, to an end.” While Europe’s largest economy grew more than anticipated at the start of the year, views differ as to whether momentum will fade or turn into a sustainable recovery. Despite the recent uptick being partly due to firms and exporters front-running US tariffs, private consumption and investments also surged. Analysts surveyed by Bloomberg expect the country to return to growth in 2025 after two years of contraction. They see gross domestic product increasing 0.2% — a rosier outlook than the stagnation anticipated by most other forecasters recently. “The German economy has had a surprisingly good start to the current year,” said Marc Schattenberg, an economist at Deutsche Bank. Still, he highlighted that despite the “clearly positive surprise” jump in the Tuesday’s data, “the military escalation in the Middle East is unlikely to be reflected in the index yet and could pose a potential setback.” Bundesbank President Joachim Nagel said Monday that the recent upward revision to first-quarter output data could push the outcome for 2025 above zero. So far, the central bank expects stagnation. Nagel went further, saying Germany could become a “success story” if politicians decisively tackle its structural problems. The Bundesbank projects growth of 0.7% and 1.2% in 2026 and 2027, mainly thanks to higher defense and infrastructure outlays. Others are even more optimistic. The Ifo Institute last week raised its projection by 0.7 percentage points to 1.5%, citing higher fiscal spending. The IfW in Kiel expects expansion of 1.6%.
Company Events
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