The Fed Stands Still, The Narrative Doesn’t

• The Fed is expected to leave interest rates unchanged.

• Concerns around oil price gains are likely to weigh

• Expect the inflation outlook forecast to move higher.

The Federal Reserve’s rate decision is a placeholder but the forward path is the headline…

Today brings one of the most closely watched moments on the global calendar. The Federal Reserve is set to deliver its final monetary‑policy decision of the year. Wall Street expects no change to the federal funds rate, leaving it pinned at 3.50% to 3.75%.

But the lack of movement isn’t the story. It’s already priced in. The real signal comes from the Fed’s forward path. As the table above shows, the bond market is now pricing in a rate hike early next year, a sharp reversal from December, when investors expected two additional cuts by year‑end.

That’s why the Summary of Economic Projections (“SEP”) is the main event. It will reveal where policymakers believe rates, growth, unemployment, and inflation are headed over the next several years. The details will tell us whether Wall Street’s assumptions about the pace of policy easing hold up.

Recent commentary suggests the Fed’s stance remains neutral with a hawkish lean. Policymakers have tried to look past the recent surge in oil prices, but 4.2% annualized inflation growth is getting harder to ignore. Don’t be surprised if the projections reflect that discomfort. Still, the absence of rate hikes should support the outlook for steady economic growth and a durable rally in the S&P 500.

But don’t take my word for it, let’s look at what the data’s telling us…

The Federal Open Market Committee meets eight times a year to set rates. It includes seven Board members and five rotating regional bank presidents, making twelve voters in total. But once a quarter, all nineteen officials (including non‑voting regional presidents) submit forecasts for key economic indicators. These are aggregated into the SEP.

Here’s what they projected at the March meeting…

Compare that to where we are currently: GDP is tracking close to 2.8%, unemployment sits at 4.3%, PCE inflation is 3.8%, and core PCE is 3.3%. The fed funds rate is currently 3.6%. Most of the projections aren’t close, but the rate path is likely to remain neutral with a more hawkish tilt for three key reasons: improving employment, decent growth, and high inflation.

The Labor Market

So far this year, employment gains have been soft but are showing signs of life. The U.S. added 172,000 jobs in May, essentially matching April’s 179,000 gain and sharply reversing February’s loss of 156,000. March and April were both solid, and first‑half hiring is running well ahead of last year.

Policymakers have noticed. Governor Christopher Waller, once concerned about labor‑market weakness, now sees stabilization. Cleveland Fed President Beth Hammack argues the 4.3% unemployment rate is consistent with full employment. This won’t force a hike, but it does argue against a dovish pivot.

Economic Outlook

Regional Fed presidents continue to highlight the economy’s resilience. New York’s John Williams and St. Louis’s Alberto Musalem both argue that steady growth gives the Fed room to keep rates high. Strong business investment and healthy consumer spending remain the backbone.

Chair Jerome Powell has been more measured but still constructive. He recently said the U.S. economy has “powered through shock after shock,” describing growth as moving at a “solid pace.” Consumer spending and fixed investment remain brisk.

Williams and Powell prefer patience — especially if a peace deal with Iran cools inflation. But Musalem has warned that if prices don’t ease soon, further hikes may be necessary. Given the sentiment, it’s likely the growth outlook is likely to shift higher, meaning a reduced need for rate cuts to sour more growth.

Inflation Growth

The last major piece of the outlook puzzle will be policymaker sentiment regarding Personal Consumption Expenditures (“PCE”). That’s the Fed’s preferred inflation gauge and what it uses to set interest rates. Currently the number is a long way from the 2% target.

Since the Iran conflict started in late February, prices at the gas pump have shot up. At the start of the conflict, the national average price per gallon was $3.04. Yet, by May, the number shot up to $4.61 or an increase of more than 50%. As a result, the pace of annualized PCE growth shot up from 2.9% in January to 3.8% in April. Given May was the recent peak in gas prices, the Cleveland Fed is forecasting 4% inflation growth for the month.

The data has encouraged policymakers like Hammack to say the Fed needs to rethink rates. She feels it might soon need to consider rate hikes to stabilize prices. Dallas Fed President Lorie Logan has said the same. And while that’s unlikely to force a change at this meeting, it will certainly support a more hawkish outlook.

Bringing It All Together

As I said at the top, the lack of change to rates isn’t the story. It’s the Fed’s evolving stance that will drive market expectations. Policymakers’ concerns may have risen due to higher gas prices, but an imminent end to the conflict could ease those fears. A sudden drop in oil prices could place downward pressure on inflation growth once more.

If the SEP confirms a steady outlook for rates, it signals that borrowing costs should remain stable. That holds the line for households and businesses on borrowing, investing, and spending. That should underpin economic growth, stabilize employment, and support a steady rally in the S&P 500.

Five Stories Moving the Market:

Oracle said that details in a Business Insider report on the collapse of its discussions with ‌Microsoft over a potential leasing deal were inaccurate; the report said that Microsoft's discussions with Oracle regarding a cloud infrastructure leasing deal have fallen apart due to security and compliance concerns – Reuters. (Why you should care – Oracle said Microsoft continues to be a cloud infrastructure partner and customer)

The U.S. will allow Iran to immediately begin selling oil and fuel under the deal to end the war, offering Tehran an early financial incentive to wind down the conflict; the provision for waivers of sanctions on oil sales takes effect immediately upon signing the agreement this week and also covers necessary services including banking, transportation and insurance needed to facilitate the sales – WSJ. (Why you should care – the removal of sanctions on Iran would boost global oil supply, likely placing additional downward pressure on prices and inflation growth)

The U.S. military says it has defended commercial ships in the Strait of Hormuz against regular threats since starting a program to assist vessels moving through the waterway, according to a document sent to the industry that lays out details of the help it’s been offering – Bloomberg. (Why you should care – the U.S. has protected over 200 ships through a passage along the Omani coast with less than five attacks)

Kevin Warsh walks into his first meeting as Federal Reserve chairman this week in an awkward spot; he argued last year for interest-rate cuts but the conversation at the Fed has shifted the other way—toward raising rates, not cutting them – WSJ. (Why you should care – the Fed is likely to leave interest rates on hold with any potential for a rate cut having shifted into next year)

Intel said the new generation of its 18A manufacturing process has entered risk production, as the chipmaker sees strong ‌demand for its central processors; by moving 18A-P into initial production, Intel is aiming to show it is following through on its manufacturing commitments, potentially making the technology more appealing to external customers – Reuters. (Why you should care - the 2-nanometer technology is meant to be the cornerstone of Intel's turnaround plan)

Economic Calendar:

Earnings: JBL, KMX, SB

U.K. - CPI for May (2 a.m.)

Riksbank (Sweden) Monetary Policy Announcement (3:30 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. - Retail Sales for May (8:30 a.m.)

U.S. - Business Inventories for April (10 a.m.)

U.S. - Pending Home Sales for May (10 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

Federal Reserve Monetary Policy Announcement (2 p.m.)

FOMC Economic Projections (2 p.m.)

Fed's Warsh (Governor) Speaks (2:30 p.m.)