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The June 18 FOMC meeting largely felt like the May meeting on repeat. Despite the growing uncertainty surrounding the path of the US economy, the Fed held interest rates steady. To us this means “patience” is the name of the game as far as the Fed is concerned. During the press conference, Chair Powell reiterated in multiple instances that the FOMC would need a few months to observe the passthrough of tariffs to consumer prices. “We don’t know where (inflation will) settle.”  He also cited a balanced labor market and solid pace of domestic growth (private domestic final purchases) as a means of gauging Q1 activity outside of trade distortions as evidence that the Fed is in a good position to continue monitoring the data. Still the question remains how inflation could rear its head later this year, as tariff impacts appear muted thus far – we expect it will take time to filter through supply chains before showing up in consumer prices. Chair Powell reiterated this uncertainty, as the Fed expects to “learn a great deal more (on the impact of tariffs on inflation) in the summer.”

Here’s what Chair Powell said when asked about tariffs, inflation, labor, interest rates, and emerging geopolitical risks

Tariffs:“The effects of tariffs will depend on their ultimate level. Expectations of the level and economic effects reached a peak in April and have since declined. Even so, increases in tariffs this year are likely to push up prices and weigh on economic activity.”

Inflation: “The pass-through of tariffs to consumer price inflation is a whole process that’s very uncertain. As you know, there are many parties in that chain. There’s the manufacturer, exporter, importer, retailer, and consumer. And each one of those is going to be trying not to be the one to pay for the tariff. But together they will all pay. Or maybe one party will pay it all. But that process is very hard to predict.”

Labor:“The unemployment rate is 4.2%. Real wages are moving up…job creation is at a healthy level, unemployment low, labor force participation in a good place.”

Interest Rates:“What we’re waiting for to reduce rates is to understand what will happen with the tariff inflation. And there’s a lot of uncertainty about that.”

Geopolitical risks:”Possible that we’ll see higher energy prices. What’s tended to happen is when there’s turmoil in the Middle East you may see a spike in energy prices, but it tends to come down. Those things don’t generally tend to have lasting effects on inflation, although, of course, in the 1970s, they famously did because you had a series of very, very large shocks. But we haven’t seen anything like that now. The U.S. economy is far less dependent on foreign oil than it was back in the 1970s.”

Additional clues from the SEP signal how the FOMC is thinking about risks

Although the changes to Summary of Economic Projections (SEP) showed further downgrades to Fed’s 2025 outlook (relative to the March SEP), the median number of interest rate cuts as indicated by the Dot Plot remained unchanged [at 2 cuts]. Interestingly the 2026 outlook also showed a downgrade to growth with higher unemployment and higher inflation, yet Fed officials signaled fewer cuts are expected next year. This could suggest the committee views growing inflationary risks stemming from tariffs. Still, Chair Powell continued to stress how the uncertain outlook means the Fed’s reaction function will remain very fluid: ”with uncertainty as elevated as it is, no one holds these rate paths with a lot of conviction.” He once again re-iterated (as he said at the May meeting) that “we may find ourselves in the challenging scenario in which (the) goals of the dual mandate are in tension.” 

The SEP revisions reflected this concern, with upward adjustments to both inflation and unemployment resulting from the impact of tariffs. Looking at both sides of the Fed’s mandate, core PCE was revised up by 0.3 percentage points to 3.1% in 2025 from 2.8% in the March projections. The unemployment rate was also revised up to 4.5% from 4.4%. But Chair Powell was again non-committal on which side of the mandate would bear more weight, and instead reiterated that priority would be determined on the basis of how far away the economy is from each goal and the effective time horizons over which those gaps will close. With the median Federal Funds rate projection for 2026 revision up to 3.6% in this month’s SEP from 3.4% in March, the Fed is showing a growing concern that inflation will remain their primary focus.

Here’s what we think the Fed will do

We previously highlighted the yellow flags that continue to evolve in response to recent shocks including tariff negotiations, oil prices spiking, and slowing job growth – but the volatility within “soft” measures means the Fed will be unlikely to rely on those signals. This means we will be hyper-focused on how the incoming “hard” data (i.e., CPI, payrolls, unemployment rate etc.) which will inform the Fed’s next move. We are expecting to see an “air pocket” of more modest inflation prints in the months ahead, as tariff shocks take time to be passed through to consumers.  At the same time, we do expect to see layoffs rise in trade related sectors – in fact, the jobless claims data this week showed a heightened number of states identifying layoffs in transportation and warehousing – and ultimately, we expect the unemployment rate will rise to 4.5% by Q3. Importantly, we expect that dynamic provides an opening for the Fed to start cutting rates by the September meeting, before tariffs creep into the consumer inflation data. For now, the Fed continues to play the waiting game – “we need to see some actual data before we decide what to do”. 

Mike Reid is a Senior U.S. Economist at RBC. He is responsible for generating RBC’s U.S. economic outlook, providing commentary on macro indicators, and producing written analysis around the economic backdrop.

Carrie Freestone is a member of the macroeconomic analysis group and is responsible for examining key economic trends including consumer spending, labour markets, GDP, and inflation.