Fed Keeps Rates Steady, Revises 2025 Economic Outlook
United States
Equities end mixed amid Middle East developments
During the shortened trading week, U.S. equity benchmarks presented mixed results, fluctuating on shifting news flows regarding escalating Middle East tensions. President Donald Trump’s Thursday statement pointing to a “substantial chance” for dialogue with Iran offered a temporary lift to sentiment on Friday. Notably, small-cap stocks outperformed, while the Nasdaq Composite recorded slight gains. In contrast, the Dow Jones Industrial Average remained nearly unchanged and the S&P 500 Index posted a modest decline. Markets were shut Thursday in observance of Juneteenth.
Fed holds firm on rates, uncertainty persists
At the June policy meeting, the Federal Reserve maintained its target federal funds rate range at 4.25% to 4.5%—marking four consecutive meetings without a rate change, aligning with market expectations. Chair Jerome Powell remarked that although uncertainty remains high, the economic backdrop is stable and the Fed stands ready to act as needed. The latest economic projections indicated two rate cuts are still anticipated for the rest of this year. However, policymakers now foresee higher inflation and unemployment through 2025 and have trimmed GDP growth expectations.
Fed Governor Christopher Waller’s Friday comments hinted at a possible rate cut as early as July, giving equities some support at the end of the week.
Retail sector dips, housing data disappoints
Economic releases generally skewed negative. The Census Bureau reported that May retail sales fell 0.9%, marking a second monthly decline after April’s slight 0.1% slip. The slump was partly driven by a sharp fall in auto purchases, which had surged in March ahead of a new 25% auto tariff effective in April. Excluding volatile segments such as vehicles, the control group measure rose 0.4%, aided by strong spending on sporting goods and furniture.
Meanwhile, the National Association of Home Builders’ Housing Market Index dropped to 32 in June—its lowest since December 2022—signaling weak builder sentiment amid high mortgage rates and policy uncertainty. Furthermore, government data revealed new home construction fell 9.8% to an annualized rate of 1.26 million in May, the lowest since May 2020.
Treasuries and credit benefit from safe-haven demand
Treasury prices rose, pushing yields lower as investors sought safety in the face of geopolitical risks and soft economic figures. Investment-grade corporate bonds also advanced and new deals generally saw strong demand. However, high yield bonds saw somewhat subdued sentiment due to equity market volatility, although new issuance remained active before the Juneteenth break.
| Index | Friday’s Close | Week’s Change | % Change YTD |
|---|---|---|---|
| DJIA | 42,206.82 | 9.03 | -0.79% |
| S&P 500 | 5,967.84 | -9.13 | 1.47% |
| Nasdaq Composite | 19,447.41 | 40.58 | 0.71% |
| S&P MidCap 400 | 3,025.18 | 18.48 | -3.07% |
| Russell 2000 | 2,109.27 | 8.76 | -5.42% |
Source: Reuters, Yahoo! Finance, Bloomberg. Data as of 4 p.m. ET.
Europe
Stocks dip as conflict fears weigh
European markets finished lower in local currency terms. The STOXX Europe 600 Index slipped 1.54% amid Middle East worries. Italy’s FTSE MIB fell 0.53%, Germany’s DAX retreated 0.70%, and France’s CAC 40 lost 1.24%. The UK’s FTSE 100 eased 0.86%.
BoE stays put; price pressures ease
The Bank of England held rates steady at 4.25% with a 6-3 vote split, citing ongoing global and domestic price pressures. Governor Andrew Bailey signaled a cautious path ahead for further cuts. UK inflation eased slightly to 3.4% year-on-year in May, while services inflation moderated to 4.7%—in line with forecasts.
Rate cuts in Switzerland and Norway
The Swiss National Bank lowered its rate by 25 basis points to 0% to counter persistent currency strength and soft inflation, pledging intervention if necessary. Norges Bank also unexpectedly trimmed its key rate by 0.25 percentage points to 4.25%, marking its first cut in five years due to easing inflation.
Mixed business sentiment
In Germany, the ZEW economic sentiment index jumped to 47.5 in June from May’s 25.2, driven by recent tax relief measures. Conversely, French manufacturing confidence weakened, with INSEE’s indicator slipping to 96 from 97.1, suggesting flat industrial output for the remainder of the year and modest GDP growth.
Eurozone current account narrows
The eurozone’s current account surplus dropped to EUR 19.3 billion in April, well below EUR 39.1 billion a year prior, as businesses advanced purchases before new U.S. tariffs took effect.
Japan
Stocks gain, BoJ steady
Japan’s Nikkei 225 rose 1.50% and the TOPIX added 0.54% for the week. The yen softened toward JPY 145 per USD. The Bank of Japan left its policy rate unchanged at 0.5% and signaled a more gradual reduction in its bond buying starting April 2026, addressing concerns over rapid yield increases in late May. Some market watchers expect a possible further rate hike later this year. The 10-year JGB yield edged up to 1.42% from 1.40%.
Trade talks stall
The G7 summit ended without a U.S.–Japan tariff accord. U.S. tariffs on Japanese imports are set to revert to 24% on July 9. Japan’s top negotiator reiterated that negotiations would continue but national interests would be safeguarded, especially for the auto sector.
May’s core CPI rose 3.7% year-on-year, above forecasts, driven largely by rising rice prices.
China
Mainland shares ease, mixed macro signals
China’s CSI 300 Index slipped 0.45% and the Shanghai Composite fell 0.51% in local currency, while Hong Kong’s Hang Seng Index dropped 1.52%. May retail sales rose 6.4% year-on-year—fastest since December 2023—helped by a government trade-in scheme. However, industrial output and fixed-asset investment lagged forecasts.
The property market remained under strain: new home prices in 70 cities dipped 0.22% month-on-month in May, the largest decline in seven months, while used home prices dropped 0.5%, the steepest in eight months, highlighting the fading impact of prior stimulus.
Other Markets
Brazil
Brazil’s Ibovespa index ended flat. The central bank lifted its benchmark Selic rate by 25 basis points to 15%, the highest in nearly 20 years, marking its seventh consecutive increase to tame inflation.
Mexico
Mexican equities retreated ahead of an anticipated half-point rate cut at Banxico’s upcoming meeting. The central bank has lowered rates seven times since August as it faces U.S. trade policy headwinds and revised down its GDP forecasts for this year and 2026. Nonetheless, officials do not expect a recession.
