More and Less
June 20, 2025 -- The Fed held a regular policy-setting meeting this week, but ultimately decided that monetary policy is in a good place at the moment. "We believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments," said Fed Chair Powell in his prepared remarks. The Fed continues to wait for "hard" data to start to reflect the effects tariff-induced upheaval earlier this year, and the uptick in inflation it is expected to bring. So far, at least, such hard evidence is hard to come by.
What's more easily seen are concerns about where things are headed later this year and beyond. With the meeting, the central bank also released an updated Summary of Economic Projections (SEP), where Fed members' individual forecasts for economic growth, inflation, unemployment and the likely position for the federal funds rate is distilled.
It's in the latest SEP where we see expectations of more and less. More inflation is expected, with both headline and core PCE prices moved up by 0.3% from their March estimates, to 3% and 3.1%, respectively, stepping further away from the Fed's 2% core PCE goal. We see forecasts for more unemployment (or if you prefer, less employment) in that the unemployment rate, currently 4.2%, is expected to end the year at 4.5%. This isn't a terrible level of unemployment, but is one moving in the wrong direction. We also see a forecast of considerably less economic growth; March's forecast for 2025 GDP growth pointed to a 1.7% pace; June's SEP now suggests a near-stall-speed of 1.4% growth for the year. As well, each of these expectations for more and less carry over into 2026, too.
While the outlook for short-term interest rates for this year was unchanged -- members still expect one to two cuts in the federal funds target rate before the calendar turns -- we see a forecast of less downward movement in rates next year, as March's expectation of two cuts in rates in 2026 has turned into a "one, perhaps two" outlook.
Chair Powell noted that "These individual forecasts are always subject to uncertainty, and, as I have noted, uncertainty is unusually elevated." As has been the case of late, ambiguity and uncertainty remain the order of the day. Mr. Powell noted that "There are many, many different scenarios, many combinations of scenarios, where inflation does or doesn't prove out to be at the levels we think and where the labor market does or doesn't soften." Queried about when the Fed may get to a place where is has greater confidence about the situation, he noted "...it's very, very hard to say when that will happen. We know that the time will come, it could come quickly, it could not come quickly." Later on he said "I don't know what the right way for us to react will be. I think it's hard to know with any confidence how we should react until we see really the size of the effects [of tariffs and policy changes], then we can start to make a better judgment," but "What we're waiting for to reduce rates is to understand what will happen with, with really the tariff inflation."
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More uncertainty, less action on policy. Greater clarity may be coming soon, or not. Tariff effects may be persistent or not. All in all, there's nothing to do but wait and hope for a positive outcome, which may or may not come.
Cost increases aren't showing as of yet. Increases in costs for imported goods have been mild in recent months, and that continued in May as they came in unchanged from April. Reflective of costs before tariffs are added, import prices are up by just 0.2% over the last 12 months and have retreated after an upward flare at the end of last year. Prices of goods outbound from the U.S. have also been in an easing pattern of late, posting a 0.9% decline in May, and edging down to a 1.7% annual clip last month. As recently as December and January, import costs were rising by 2.2% per year and exports by 2.8%. At some point, the effects of higher costs along production chains should start to be reflected in these figures, but not so far.
Last month, we learned that more sales of new homes took place in April; we'll see how they fared in May next week. What we see less of already in June is home builder enthusiasm, not that there has been much of it of late. The National Association of Home Builders Housing Market Index retreated three more points to 32 this month, the lowest monthly figure since December 2022. High mortgage rates, tariff effects on input costs, labor issues and more are weighing on builder sentiment. The measure of sales of single-family homes slid two points to 35, a 13-year low (although 36 in December 2022 was pretty close). The outlook for the next six months also declined two points to 40, and homebuyer traffic at model homes and sales offices stepped down two points to 21, a 17-month low. It's worth noting that sales of new homes have generally been fair this year even the collective demeanor of home builders have been quite dour.
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There was less new construction of new homes in May. Housing starts declined by 9.8%, coming in at 1.256 million (annualized) units underway. Single-family starts bucked the headline figure, rising by 0.4% to a 924,000 annual pace, so all the decline came from the more volatile multifamily sector, which posted an outsized 29.7% decline to 332,000 units begun. While subject to considerable revision each month, the annualized May figure was the lowest in about five years, or back to when the pandemic first upended everything. Looking forward, permits for future home construction also retreated by 2%, with single-family home permits sliding by 2.7% (to 898,000 annualized units) and multifamily by 0.8% (495,000 units).
After a pre-tariff binge in March and April, retail sales had a bit of hangover in May, as overall retail sales declined by 0.9%. The biggest culprits in the fall were the sectors most likely to be impacted by tariffs, including motor vehicles and parts (-3.5%), electronics and appliances (-0.9%) and building materials (-2.7%). Falling sales at gas stations (-2%) also pulled the top-line figure down, but those will likely reverse given typical post-Memorial day increases in oil and gasoline prices and the effects of the new Israel/Iran conflict on supplies. The 23% increase in the cost of oil since the end of last month bears watching.
Higher energy costs won't improve either consumer moods or business sentiment, and these are factors that are contributing to the repeated negative values for the Conference Board's index of Leading Economic Indicators. The LEI for May posted a value of -0.1, part of a nearly-unbroken string of negative vales that dates back to February 2022. The latest decline brings the LEI to about a 10-year low as there has been no improvement after sizeable declines in both March and April. While the LEI is thought to be predictive of the trajectory for the economy over the coming months, it may better reflect the conditions in the month in which its components are gathered. Despite a long string of negative readings, the economy has performed quite well, even managing some robust periods along over that time.
Manufacturing activity remained subdued during June in two Fed Districts. The Federal Reserve Banks of New York and Philadelphia chimed in with their monthly updates this week, and the overall tenor of them was soft. The FRB/NY's local barometer posted a -16 mark for this month, a 5.8-point decline from an already soggy value in May. A measure of new orders retreated 21.2 points, falling from a +7 in May to -14.2 for June. Labor conditions improved, though, rising from -5.1 to +6.7 for the month. There was an encouraging sign to be seen in the "prices paid" inflation measure; this figure retreated from 59 in May to 46.8 for June. While still elevated compared to the end of last year, it may just be that at least the early impact of tariffs isn't having a lasting effect on manufacturers' inbound costs.
Just down the block from the NY Fed, the Philadelphia Fed's local gauge told a similar tale, if perhaps somewhat better. The -4.0 posted for manufacturing activity in June was the same value as was seen in May, so no worsening, although no improvement, either. That said, new orders managed to post a modestly positive figure for a second month with a +2.3, a welcome sign. Labor conditions retreated sharply, however. posting a 25.7-point decline from +16.5 in May to -9.8 for June, its first negative value since last October and the most negative monthly value since the pandemic shutdown month of May 2020. Countering this discouraging news was that, like New York, the prices paid gauge in the Philly district also settled back last month, declining to 41.4, down 18.4 points from May's reading, suggesting that at least the initial tariff imposition may not have a durable impact.
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There was less overall industrial production in May, as IP eased by 0.2% While both manufacturing (+0.1%) and mining output (+0.1%) added to the tally last month, a 2.9% decline in utility production erased those contributions and then some. Utility output is highly dependent on highly-variable weather conditions, and summer heat and demand for air conditioning will likely show in the data soon enough. Until then, the decrease in production also meant a decrease in the percentage of industrial production capacity in active use, which slipped 0.3% to 77.4% for the month. Anything above the 80% level might lead to inflation-enhancing production bottlenecks, but capacity utilization hasn't reached that mark since November 2022.
The Fed still considers labor conditions to be quite solid, and with job growth still happening and unemployment at 4.2% it's hard to argue the point. That said, the recent upward bump in initial claims for unemployment benefits seems to be proving more durable than previous flares, and in the week ending June 7, another 245,000 new applications for assistance were filed. It may be that the recent pattern is one we've seen near the start of summer over the last few years; a upward trend for a time, followed by a retreat. Let's hope this is the case, and not that layoffs have moved to a new level or are poised to rise further. Continuing claims for assistance decreased modestly in the latest reporting week, with a 6,000 decline leaving the total at 1.945 million.
Applications for mortgage credit eased in the week ending June 13, according to the Mortgage Bankers Association. Overall, requests for housing loans declined by 2.6%, with applications for funds to purchase homes falling by 3% and those to refinance existing loans by 2.1% for the week. Mortgage rates have been stagnant at current levels for weeks, and borrowers are in no hurry to jump in for new loans at these nominal levels.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jun 13 | May 16 | Jun 14 | |
| 6-Mo. TCM | 4.31% | 4.29% | 5.38% |
| 1-Yr. TCM | 4.10% | 4.12% | 5.12% |
| 3-Yr. TCM | 3.92% | 3.98% | 4.50% |
| 10-Yr. TCM | 4.43% | 4.47% | 4.32% |
| Federal Cost of Funds |
3.662% | 3.663% | 3.956% |
| 30-day SOFR (daily value) | 4.30385% | 4.33128% | 5.32466% |
| Moving Treasury Average (MTA/12-MAT) |
4.308% | 4.398% | 5.173% |
| Freddie Mac 30-yr FRM |
6.84% | 6.86% | 6.87% |
| Historical ARM Index Data | |||
More and less. Until we get more data, we are likely to see less Fed action. Expectations are for more inflation, but at least at the moment, we're seeing less initial impact from tariffs than might have been expected not long ago. While there was less growth seen in the first quarter of 2025, the Atlanta Fed's GDPNow model suggests there is more in the second quarter, pegging the running rate for GDP at 3.4% through June 18, while the NY Fed's Nowcast puts the increase at less, with just a 1.91% working figure through June 20.
All in all, and geopolitical and military concerns aside, it's starting to feel as though a summer of stasis -- or at least a summer of stagnation -- for interest rates may be in the offing this year, as we wait for clues as to the impact of trade policy changes. That said, any number of current events have the power to totally change things in a hurry, so perhaps stagnation might not be a bad thing, given the alternative.
At the moment, mortgage rates are nearly identical this year compared to last. At that time, they spent a number of weeks wandering around until the Fed signaled it would soon be cutting short-term rates, with those hopes fostered by a then-softening labor market. While history may repeat itself this year, the outcome might not be exactly the same, what with the inflation concerns of tariffs hanging over financial markets for the foreseeable future. While this is something to be pondered on another day, we'd expect to see near-stasis for mortgage rates next week (again), with perhaps just a one-to-three basis point decrease in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac.
Although there is much uncertainty and the financial markets have been volatile, we're undaunted, and offer our latest Two-Month Forecast for mortgage rates covering late April through late June.
See our 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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