While leaving interest rates unchanged, the Fed adjusts its forward guidance

Richard Schmidt

June 18, 2025

Key takeaways

The target for the U.S. federal funds rate remains unchanged at 4.25-to-4.5%.
Trade, regulatory and fiscal policy uncertainty remains and escalating tensions in the Middle East have raised the Fed’s concerns about growth, employment and inflation.
In portfolios with a tactical asset allocation overlay, we have moved to a modest tactical overweight to global equities vs. fixed income and cash.

While U.S. President Trump continues his rather public campaign for lower interest rates, the U.S. Federal Reserve (Fed) once again demonstrated its independence and held the target for the federal funds rate at 4.25-to-4.5%. Following the rate cut last December which brought the target to its current level, the Fed has now held the target in four consecutive Federal Open Market Committee (FOMC) meetings. These decisions have come widely anticipated and unanimously voted for by members of the FOMC.

Fed tweaks interest rate expectations as views across voting members start to diverge

Alongside the rate announcement, the Fed also released its updated Summary of Economic Projections (SEP)—which still favours two 0.25% rate cuts in 2025, but only one 0.25% cut in each of the next two years. The March SEP had an additional 0.25% cut in 2026. While this doesn’t seem like a major change, it must be noted that there is greater disagreement amongst voting members of the FOMC, where several members would prefer the federal funds rate to remain unchanged for the remainder of the year. We continue to expect the Fed to cut rates later this year.

U.S. growth continues to be solid, risks continue to rise

While acknowledging export swings may have impacted the data, the Fed continued to note that “economic activity has continued to expand at a solid pace,” that unemployment “remains low,” that labor market conditions remain “solid,” and that inflation “remains somewhat elevated.” The Fed continues to justify its wait-and-see approach as uncertainties in trade, regulatory and fiscal (One Big Beautiful Bill) policy remains unresolved. Adding to the already complex web the Fed must navigate in its decision making, is the escalating tension in the Middle East. Given this backdrop, it isn’t a surprise that the Fed’s expectations for growth have been dialed back, unemployment dialed up and inflation dialed up in the latest SEP.

Modestly increasing our allocation to equities in portfolios with a tactical asset allocation overlay

Since the volatility we saw earlier in the year, stock markets have broadly recovered. However, financial assets remain sensitive to trade and geopolitical developments.

Within our portfolios with a tactical asset allocation overlay, we have tactically increased exposure to equities overall relative to fixed income and cash. As evidenced in the Fed’s comments, risks remain elevated and the outlook for the global economy and financial markets remains clouded. However, given the expectations of further fiscal accommodation globally, combined with central bank policy rates broadly easing from prior highs, we have positioned portfolios to benefit from a resumption of the long-term growth trend for global equities. We will continuously monitor the evolving landscape to determine if strategic or tactical adjustments are needed to best position your portfolios for long-term success.

We continue to emphasize underlying strategies that give our portfolios access to high-quality companies with strong balance sheets, competitive advantages, and proven margin resilience during times of economic and market stress. Diversification—our strategic allocation across asset classes, sectors, and geographies—continues to help cushion portfolios against area-specific downturns while positioning to capture growth across various market segments.

The Fed’s next interest rate announcement is scheduled for July 30^th.

Richard Schmidt

Richard Schmidt, CFA, is a Portfolio Manager with the Multi-Asset Management Team of Scotia Global Asset Management. His primary focus is on North American equity funds and pools.

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