The June FOMC meeting was “basically a wash”, says the team at BofA Global Research, comprising analysts Aditya Bhave, Mark Cabana, Alex Cohen, as well as the US economics and global economics rates and foreign exchange (forex) teams.
The team, which does not expect to see any rate cuts this year, notes the Fed’s statement that uncertainty has “diminished”. The statement also omitted the language around rising risks of higher unemployment and inflation. “We think this reflects the de-escalation in trade tensions with China during the intermeeting period,” adds the BofA team.
Following the FOMC meeting briefing, the team is keeping its core rate views. With this, it continues to like being “paid at the front end and fading the extent of near-term Fed rate cuts”. The team also likes being paid the December 2025 FOMC overnight indexed swap (OIS) and they see the logic in being paid the September 2025 FOMC OIS.
The BofA team is also long on the two-year, three-year inflation swaps given the steep drop in inflation pricing and limited risk of persistently elevated inflation. At the same time, the team is short on the 30-year asset swap spreads due to the long-end supply, as well as demand issues and disappointment around the near-term financial de-regulation.
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The team is currently “very comfortable” with its long-end US treasury (UST) rate forecasts that expected the 10-year to be at 4.35% at the end of the 2Q2024 and 4.5% at the end of 2024.
Split within Fed a ‘surprise’: Julius Baer
Julius Baer analyst David Meier is also keeping his forecast for the Fed to hold interest rates over the summer months, although he foresees a “rapid removal” of the restrictive policy stance with two cuts of 50 basis points at the September and October meeting once incoming data reflects weakness.
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“With the hold, the Fed is sticking to its data-dependent stance and withstanding the political pressure to cut rates,” says Meier in his note released on June 19.
The way he sees it, the forecasts in light of the recent tariff developments and fiscal plans showed a “stagflationary” impact for this year with the policy response focusing more on inflation risks.
As such, he believes that the “odds of a more gradual policy easing than reflected” in his forecast has increased.
The split within the Fed came as a “surprise” to Dario Messi, head of fixed income analyst at Julius Baer, especially with the disagreement among officials expanding beyond 2025.
However, he feels that there is “still a very good chance” that the Fed will start its second cutting cycle and start moving toward a more neutral stance after the summer break.
“Taking into account the June central bank update, compared to recent months, we feel confirmed in the view that there might be a stronger counterforce pulling down yields should they attempt to rise too quickly in the second half of 2025,” says Messi. “However, this does not mean that we would add extensive duration to our portfolio at this point.”
With the current risk and return structure, Messi says he still sees the most value for new bond investments around the three- to seven-year horizon. He adds that he also prefers to add measured corporate and/or emerging market credit risk to generate extra yield, instead of relying on the term premium through longer-dated bonds with no credit risk.
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Projections for 2026 to 2027 look ‘hawkish’, says DBS
DBS Group Research analyst Eugene Leow, who noted the split, said the projections for 2026 to 2027 look “hawkish” given the higher inflation expectation by the summary of economic projections (SEP). The quarterly SEP showed a more stagflationary projection with personal consumption expenditures (PCE) inflation revised upwards. The unemployment rate projection for 2025 and 2026 was also increased.
“Note that the higher inflation forecast came about despite muted actual inflation over the past two months,” Leow writes. “There has been little to no impact on headline / core inflation from tariffs thus far but Fed chair Powell has indicated that some impact over time would be inevitable.”
On the Fed’s decision to keep its dot plot to two cuts in 2025 but reduce the subsequent two years by one cut each, two cuts for 2025 should be seen as “dovish” and the projections in the subsequent years, “hawkish”.
“Even in 2027, the Fed would not be back at its own estimate of neutral, which is kept unchanged at 3%,” says Leow.
With the FOMC out of the way and no key data due “for some time”, the analyst notes that attention will shift back towards the Israel-Iran conflict and trade/tariff negotiations.
Market participants have been “complacent” on the geopolitics front, says Leow, although he adds that there may be some sentiment deterioration should the US become involved in the conflict in the Middle East.
“We also note that the reciprocal tariff deadline is approaching and that trade deals have been scarce. Another fresh set of tariff announcements could provide another jolt to the market,” he says.
UOB keeps three 25 bps rate cuts forecast for 2025
UOB’s head of research, Suan Teck Kin, is maintaining his forecast of three rate cuts at 25 basis points (bps) each for 2025 after there were “no surprises” from the June FOMC meeting.
Suan is predicting for these cuts to be executed at the FOMC meetings in September, October and December, although Fed governor Christopher Waller told the media, a day after the FOMC meeting, that the US central bank could lower interest rates as soon as July.
Suan’s predicted cuts will bring the Fed funds target rate to 3.75%, which is at the upper bound of the target rate by the end of 2025.
“We are also keeping our view for the two rate cuts for 2026, implying a lower terminal Fed funds target rate of 3.25% in 2026,” he says.
Fed likely to lower rates in September
Matthias Scheiber, senior portfolio manager and head of the multi-asset solutions team at Allspring Global Investmentsalso sees the Fed to lower rates at the September meeting.
Scheiber is expecting the Fed to cut its interest rates twice this year should US inflation continue to be lowered towards its 2.0% target. That said, while inflation has been trending downwards, Scheiber warns that a tight labour market and increased tariffs could bring about a short-term increase in inflation.
“Although uncertainty has prevailed in recent months, we think this environment offers potential opportunities for investors in areas of the equity and fixed income markets,” he says.
Current wage growth means inflation is unlikely to go back to 2%
The Fed is in “no rush” to cut rates with the US economy remaining strong, points out Jean Boivin, head of the BlackRock Investment Institute.
“Unemployment is low, we’ve seen little pick up in layoffs, wages are growing at a healthy clip and labor demand is slowing broadly in tandem with labour supply,” Boivin writes. “That characterisation suggests that the Fed is in no rush to cut rates and its revised ‘dot plot’ showed a slightly higher expected rate path versus March, with two quarter-point cuts expected before the end of the year.”
He adds that the Fed is now recognising the trade-off between protecting growth and curbing inflation, with Fed chair Powell noting that the tariffs would see a “meaningful amount of inflation” in the coming months.
While the Fed’s base case seems to be that the tariffs will have a one-off impact on inflation, Boivin notes that the central bank is “understating” the extent of future inflation pressure.
Even now, the current wage growth at close to 4% on an annualised basis makes it difficult for inflation to settle back at 2%, he notes.
“The gap between core inflation and wage inflation is now near its widest in four years, meaning that unless wage growth slows, companies will need to accept a margin squeeze or inflation will tick up again soon, even before accounting for the tariff impact,” Boivin writes.
“Surveys by the National Federation of Independent Business suggest companies are ready to hike prices in response to tariffs, but they too are likely biding their time for now,” he adds. “Longer term, we see ongoing inflation pressure from mega forces like the AI buildout, ageing populations and geopolitical fragmentation limiting how far the Fed can cut.”
