Where Are Interest Rates Going Next?
In June, the Fed maintained rates, prioritizing inflation control despite tariff-driven uncertainties. While two rate cuts are anticipated by year-end, policymakers await clear evidence of labor market softening. During bond market volatility, disciplined, goal-focused investing remains essential.
Key takeaways
The Fed left rates unchanged at its June meeting, continuing to emphasize that it is in no hurry to act preemptively to boost the economy.
While policymakers currently expect 2 rate cuts before the end of 2025, they may need to see evidence of a weakening labor market before acting on rates.
The Federal Reserve left interest rates unchanged at its June meeting, emphasizing that it’s in no hurry to step in with preemptive rate cuts at a time when inflation expectations have increased significantly. The Fed decided to keep the target for the federal funds rate at a range of 4.25% to 4.50%, where it has held steady since December of last year.
The Fed has been navigating a challenging environment in recent months. Tariffs have raised the risks of higher inflation and slower growth as political pressure to cut rates has increased. Investors finally got a window into how the new tariffs have impacted the Fed’s outlook, as the central bank also released updated economic projections at its June meeting—the first such update since March.
1. Why did the Fed leave rates unchanged?
At its current range of 4.25% to 4.5%, the fed funds rate is “modestly restrictive,” according to the Fed, meaning it’s high enough to have a bit of a drag on the economy. It's as if the Fed still has its foot ever so slightly on the brakes (though it has eased off significantly since a year ago, when the fed funds rate was a full percentage point higher).
It might seem strange that the Fed is trying to slow the economy at a time when recession risks have increased. But the Fed is keeping rates slightly elevated to help head off higher inflation risks. New tariffs are generally expected to be inflationary, and a higher fed funds rate is the Fed’s primary tool in bringing down inflation.
Consumers’ inflation expectations have increased significantly this year, even though tariff-related price increases haven’t seemed to show up yet in monthly inflation numbers.
Inflation rate is defined as the year-over-year change in the Consumer Price Index (CPI), which is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Inflation expectations represent the median expected change in prices over the next 12 months, based on the University of Michigan Surveys of Consumers. Data as of June 16, 2025. Sources: US Bureau of Labor Statistics, University of Michigan.
“Many businesses and importers anticipated that higher tariffs were coming, so they accelerated their imports into the first quarter of the year—building up their inventories,” says Kana Norimoto, Fidelity fixed income macro analyst. “So they haven’t necessarily had to pass on price increases yet.”
As businesses work down those inventories, as tariff policy eventually settles, and as consumers adjust to some higher prices, the actual impact on inflation should become clearer.
2. When might rate cuts be coming?
High inflation expectations and high inflation uncertainty may continue to weigh in favor of leaving rates where they are. This means support for cutting rates will likely have to come from the other side of the Fed’s mandate: unemployment.
However, the general sense of economic uncertainty hasn’t yet translated into job losses, with the unemployment rate keeping steady at 4.2% for the past 3 months. “So far employment has continued to hold up, even after the tariff announcements, government layoffs, and fears of a slowdown in manufacturing,” says Andrew Garvey, monetary policy analyst on Fidelity’s Asset Allocation Research Team.
At its meeting the Fed released a newly revised dot plot, a key chart that shows how Federal Open Market Committee (FOMC) members believe interest rates may evolve.
Source: Federal Reserve Open Market Committee Summary of Economic Projections, June 18, 2025.
The dot plot showed that a median of FOMC members expect 2 more cuts of a quarter of a percentage point before the end of the year—an expectation that was unchanged since March. But those dots represent personal estimates of individual members rather than a commitment from the Fed.
Norimoto agrees with the current market consensus, which is that further rate cuts are unlikely to come sooner than September.
“It’s harder for the Fed to preemptively cut rates, to head off a possible future increase in unemployment, when inflation expectations have risen so much,” says Norimoto. “This keeps the Fed highly dependent on the hard data on labor.”
In other words, the Fed will likely want to see 2 to 3 months of data showing a weakening job market before it steps in with a rate cut (though it can act sooner if it sees sudden or severe deterioration).
3. Where does the Fed think the economy is going?
The Fed emphasized at the meeting that the economy is still in a strong position, though the outlook is uncertain.
The Fed’s updated economic projections showed how its members’ outlooks for 2025 have shifted in the past 3 months. Compared with the March projections, members are now expecting lower economic growth, higher inflation, and a higher unemployment rate for 2025, based on the median of reported expectations. However, members are expressing slightly less uncertainty around the trajectories of growth and unemployment than they were in March.
4. What's going on with bond interest rates?
The Fed only controls interest rates on very short-term loans (the fed funds rate is the rate banks charge one another for overnight loans). Rates on longer-term loans, like 10-year Treasurys, are driven by market forces.
Recent volatility in Treasury yields has sparked some concerns of possible fragility in the Treasury market—and speculation of escalating interest-rate volatility ahead. But Jake Weinstein, senior vice president on Fidelity’s Asset Allocation Research Team, notes that some of these concerns may be overstated.
“Some of the day-to-day turbulence can be explained by hedge funds unwinding certain extreme positions,” Weinstein says. “But if you zoom out, Treasuries have generally been doing what they’re expected to do,” with rates falling as recession risks increased and rising as recession risks decreased. He adds that rates on long-term Treasurys have recently been roughly at fair value.
While there could be more volatility ahead, Weinstein says bonds may still have a role to play in a diversified portfolio. “When the level of interest rates is higher, there can be higher volatility. When there is concern about inflation or deficits, there can be higher volatility,” Weinstein says. “But the beauty of bonds is they can provide diversification and insurance, while providing a source of income.”
5. What should investors do right now?
There are no easy answers as to exactly how the economy unfolds from here, or what that will mean for interest rates. While a further modest decline in the fed funds rate appears to be on the horizon for this year, that expectation could always shift—in either direction—as new data comes in. And long-term interest rates can be even more difficult to forecast, due to the complexity of the forces that drive them.
Rather than try to forecast where interest rates may head next, many investors might be better served by an investing plan that’s suited to their goals, needs, time horizon, and risk tolerance, and that they can stick with through a variety of interest-rate and market environments.
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