Market Update – June 23rd, 2025

Financial Markets

Markets appear relatively calm Monday following U.S. strikes on Iranian nuclear sites over the weekend, though sentiment could shift quickly depending on the nature and timing of any Iranian response. Recapping last week, equities were mostly flat as the Federal Reserve held interest rates steady, as expected. As of Friday, June 20th, the S&P 500 declined 0.15%, the Dow Jones Industrial Average inched up 0.02%, and the Nasdaq Composite rose 0.21%.

Source: Y-Charts

Market News

June Federal Reserve Meeting. At its June FOMC meeting, the Federal Reserve kept the federal funds rate steady at 4.25%–4.50%, extending a six month pause in rate cuts. Although recent inflation data shows progress, upside risks persist, such as new tariffs and rising oil prices due to tensions in the Middle East, complicating the inflation outlook and delaying a June rate cut.

At the same time, labor market data is beginning to soften, with rising continuing unemployment claims signaling cooling economic momentum and supporting the case for eventual easing. Still, with inflation above the 2% target and upside risks remaining, the Fed remains cautious, aiming to balance its dual mandates of price stability and maximum employment.

Source: Y-Charts

Summary of Economic Projections. With no rate cut as the market expected, the focus of the June Federal Reserve meeting shifted to the quarterly Summary of Economic Projections (SEP), which shows the Fed’s forecasts for interest rates, unemployment, inflation, and economic growth. Compared to March’s projections, the SEP reflects a more cautious outlook on the US economy.

Real GDP growth forecasts were revised lower, with the Fed now expecting 1.4% growth in 2025, down from 1.7%, and 1.6% in 2026, down from 1.8% in March’s forecast. Unemployment projections increased slightly, with the Fed now anticipating the unemployment rate rising to 4.5% in both 2025 and 2026, up from previous estimates of 4.4% and 4.3%, respectively.

Inflation expectations also shifted upward. The Fed raised its forecast for overall PCE inflation to 3.0% in 2025 from 2.7%, and to 2.4% in 2026 from 2.2%. Core PCE inflation, which excludes volatile food and energy prices, was similarly revised higher, to 3.1% in 2025 and 2.4% in 2026, both above March’s estimates.

In response to a higher inflation forecast, the Fed’s projections for the federal funds rate emphasize a “higher for longer” stance. While the median forecast for 2025 remained unchanged at 3.9%, implying 50 basis points of rate cuts in the second half of this year, rates are expected to stay elevated throughout 2026 and 2027, with projections rising to 3.6% and 3.4%, respectively, both higher than previous forecasts. Overall, the SEP reflects a more cautious Federal Reserve compared to three months ago.

Source: Federal Reserve

Retail Sales. May retail sales declined 0.9%, a deeper drop than the 0.6% decline expected, even as consumer sentiment improved during the month. Sales were still up 3.3% from a year ago, modestly outpacing inflation, but the monthly weakness was broad. Leading the decline were motor vehicles and parts (-3.9% MoM), gas stations (-2.0% MoM), and food services and drinking places (-0.9% MoM).
Offsetting some of the decline was month over month sales growth in furniture, clothing, and sporting goods stores. The report adds to a growing list of data points indicating signs of strain from consumers.

Source: US Census Bureau

Leading Indicators. The Leading Economic Index (LEI) fell slightly in May, continuing to signal a slowdown and potentially a recession. Within the index, consumer expectations for business conditions dropped sharply, and new orders also declined significantly, continuing to show weakness. A rebound in stock prices during the month helped offset some of this softness, while most other components saw less notable month-over-month changes. Overall, the LEI continues to be a bearish sign for the U.S. economy.

Source: The Conference Board

Summary

Last week, markets were mostly flat as the Federal Reserve held rates steady and released a more cautious set of economic projections, signaling slower growth, higher inflation, and a “higher for longer” rate outlook. Economic data pointed to weakening momentum, with slower than expected retail sales and a continued decline in the Leading Economic Index, reinforcing concerns about a potential recession.

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