At the June meeting, the FOMC remained positive on the underlying health of the US economy and sanguine on the outlook for inflation. Members believe they are most likely to continue cutting the fed funds rate at a measured pace through H2 2025, 2026 and into the ‘longer run’. The terminal fed funds rate for this cycle remains in line with their estimate of neutral at 3.0%.

With headline GDP fluctuating wildly through Q1 and Q2 as tariff fears and haphazard implementation affect net exports, the FOMC’s characterisation of GDP growth as ‘solid’ is based on the underlying pulse in private final demand. In Chair Powell’s discussion of current conditions, he rightly emphasised that business investment had been a dominant contributor to this recent growth. The consumer, by contrast, has increasingly been weighed down by anxiety over the outlook.

The Committee’s median GDP forecast was revised down from 1.7%yr to 1.4%yr in 2025 and from 1.8%yr to 1.6%yr in 2026. This points to trade policy further weighing on confidence and economic activity in coming quarters – a trend also called out by FOMC Chair Powell in the press conference. Still, the revised forecasts are only marginally below the FOMC’s estimate of trend growth (1.8%yr), returning to that level from 2027.

Given this expectation for activity growth and the resilience the labour market has shown over the past year, the unemployment rate is expected to peak at only 4.5% in 2025 and to edge back down towards the full employment level thereafter, returning to 4.2% in the ‘longer run’ on the Committee’s median view. The full range of participant forecasts signals little risk to this track: the top of the unemployment rate range is just 4.7% in 2026 and 2027, balanced by a bottom-of-the-range forecast of 4.0% in 2027 – below the FOMC’s ‘longer-run’ full employment estimate.

On inflation, the FOMC are clear that someone will eventually have to pay for the tariffs, most likely the US consumer. Still, the net impact on consumer inflation is seen as modest and short lived. Annual headline and core inflation is forecast to top out at around 3.0% at end-2025 then decelerate quickly back towards target, to 2.4%yr in 2026 and 2.1%yr come 2027.

The full range of forecasts from Committee members points to a greater degree of apprehension over the risks for inflation than economic activity and employment. The top-of-range median forecast for core inflation is 3.5%yr in 2025 and around 3.0%yr in 2026 and 2027. These are outcomes that would require monetary policy to remain restrictive throughout this period instead of returning to neutral as per the Committee’s median view.

We continue to see downside risks to growth and employment compared to the FOMC’s expectations, forecasting GDP growth of 0.9%yr,1.0%yr and 1.5%yr in 2025–2027 and a sustained lift in the unemployment rate to 4.8%. But we also expect to see more persistent inflation pressures and risks in 2026 and 2027, more as a result of supply constraints than delayed tariff effects.

In our view, it is therefore most probable that the FOMC will be on hold at a mildly contractionary level of 3.875% in 2026 and 2027 after two 25bp cuts in H2 2025. If the Administration’s recent communications on trade negotiations prove an accurate guide on the end state for bilateral relations, in coming months the market’s focus will progressively shift from transitory tariff risks to the long-lasting structural supply constraints the US economy faces, including migration, and its highly uncertain fiscal trajectory. In addition to the limitations placed on monetary policy, such an outturn is likely to see higher long-term yields. Westpac forecasts the US 10-year yield rising back towards 5.0% in 2026 and 2027, further tightening financial conditions for households and businesses.

Economics

Westpac Coast-to-Coast June 2025

Stay informed with Westpac IQ

Latest articles

Around the Grounds

FinanceAM

What's Priced In

Browse topics