Summary
Monetary Policy Report submitted to the Congress on June 20, 2025, pursuant to section 2B of the Federal Reserve Act
Inflation has continued to moderate this year, though it remains somewhat elevated. The labor market is in solid shape, with a moderate pace of job gains so far this year and the unemployment rate at a low level. Although growth in real gross domestic product (GDP) is reported to have paused in the first quarter, growth in private domestic final demand was moderate, reflecting a modest increase in consumer spending and a jump in capital spending. However, measures of household and business sentiment have declined this year amid concerns about the effects of higher tariffs on inflation and employment as well as heightened uncertainty about the economic outlook.
With the labor market at or near maximum employment and inflation continuing to moderate, the Federal Open Market Committee (FOMC) has maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. The FOMC's current stance of monetary policy leaves it well positioned to wait for more clarity on the outlook for inflation and economic activity and to respond in a timely way to potential economic developments. The Federal Reserve has also continued to reduce its holdings of Treasury and agency mortgage-backed securities and, beginning in April, further slowed the pace of decline to facilitate a smooth transition to ample reserve balances. The FOMC is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Recent Economic and Financial Developments
Inflation. After declining modestly last year, consumer price inflation has continued to ease this year, although progress has been bumpy. The price index for personal consumption expenditures (PCE) rose 2.1 percent over the 12 months ending in April, down from 2.6 percent at the end of last year. The core PCE price index—which excludes often-volatile food and energy prices and is generally considered a better guide to the future of inflation—rose 2.5 percent over the 12 months ending in April, below the 2.9 percent increase observed at the end of last year. Although measures of shorter-term inflation expectations have moved sharply higher this year, reflecting concerns around tariffs, most measures of longer-term inflation expectations have remained within the range of values seen in the decade before the pandemic and continue to be broadly consistent with the FOMC's longer-run objective of 2 percent inflation.
The labor market. The labor market is in solid shape, with supply and demand about in balance. The unemployment rate, at 4.2 percent in May, has been relatively flat since the middle of last year at a level that is low by historical experience; job vacancies have continued to edge down, while layoff activity has been subdued. As labor demand has cooled somewhat further so far this year, monthly job gains have slowed to a moderate pace on average. Labor supply has increased less robustly than in previous years, with immigration appearing to have slowed sharply since the middle of last year and the labor force participation rate having declined a bit. With the labor market about in balance, nominal wage gains have continued to moderate this year and are now close to the pace consistent with 2 percent inflation over the longer term.
Economic activity. After having increased at a solid pace last year, real GDP is reported to have edged down in the first quarter. The slowdown was mostly due to a historic surge in imports ahead of expected increases in tariffs that was only partially offset by a pickup in measured inventories. Growth in private domestic final purchases, in contrast, was moderate in the first quarter, reflecting a modest increase in consumer spending and a jump in capital spending. Other measures of domestic production, such as those from the labor market as well as manufacturing output, rose solidly in the first quarter, although manufacturing has shown signs of weakness more recently. In the housing market, new home construction has softened slightly this year, while existing home sales remained depressed, with mortgage rates still elevated.
Financial conditions. Since the beginning of the year, yields on short- and medium-term nominal Treasury securities moved moderately lower, on net, reflecting a significant decline in real yields that offset an increase in near-term inflation compensation. The expected path for the federal funds rate for this year fluctuated in response to investors' changing concerns about higher near-term inflation and downside risks to economic growth. The expected path for next year was notably lower, with financial market prices implying that the federal funds rate will decline more than 100 basis points from current levels to 3.3 percent by the end of 2026. Broad equity prices were little changed but experienced sizable declines in early April following the announced changes to U.S. trade policy before retracing. Spreads on investment-grade corporate bonds increased modestly, consistent with somewhat increased concerns about the corporate outlook, but remained low by historical standards. Credit continued to be broadly available to most nonfinancial firms, households, and municipalities, but it stayed relatively tight for small businesses and households with lower credit scores. Bank lending to households and businesses grew only slightly, likely reflecting still-elevated interest rates and tight lending standards.
Financial stability. Overall, the financial system remained resilient amid heightened uncertainty and withstood considerable volatility in April. Smoothing through this volatility, valuations remained high relative to fundamentals in a range of markets, including those for equities, corporate debt, and residential real estate. Total debt of households and nonfinancial businesses as a fraction of GDP continued to trend down and is now at its lowest level seen in the past two decades. The banking system remained sound and resilient, with continued increases in regulatory capital, while outside the banking sector, leverage at hedge funds remained near historically high levels. Vulnerabilities from funding risks improved somewhat since earlier this year, in part due to a reduction in banks' reliance on uninsured deposits, particularly at the largest banks. That said, structural vulnerabilities remain in other cash-investment vehicles, where assets under management continued to grow. (See the box "Developments Related to Financial Stability.")
International developments. Foreign growth picked up a bit in the first quarter of 2025, supported in part by increased demand from U.S. importers that likely reflected a pull-forward ahead of expected tariff hikes. That said, indicators of business conditions and confidence in many foreign economies have declined notably this year and suggest weakening growth prospects abroad. Headline inflation moderated further across most foreign economies. Several foreign central banks have continued to lower policy rates, citing a deteriorating outlook for growth and continued easing of inflationary pressures in their economies. However, foreign central bank communications have generally emphasized the need to maintain policy flexibility amid considerable uncertainty. Since early 2025, the broad dollar index—a measure of the exchange value of the dollar against a trade-weighted basket of foreign currencies—decreased on net. The decline in the dollar index was broad based, with depreciations against the currencies of both advanced and emerging market economies.
Monetary Policy
Interest rate policy. Since the beginning of the year, the FOMC maintained the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. The FOMC's current stance of monetary policy leaves it well positioned to wait for more clarity on the outlook for inflation and economic activity and respond in a timely way to potential economic developments. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
Balance sheet policy. The Federal Reserve has continued the process of significantly reducing its holdings of Treasury and agency securities in a predictable manner and decided to further slow the pace of this decline beginning in April. The Federal Reserve has reduced its holdings of Treasury and agency securities by about $180 billion since the beginning of the year, bringing the total reduction in securities holdings since mid-2022 to more than $2 trillion. The FOMC has stated that it intends to maintain securities holdings at amounts consistent with implementing monetary policy efficiently and effectively in its ample-reserves regime, and it intends to stop reductions in its securities holdings when reserve balances are somewhat above the level that it judges to be consistent with ample reserves.
Special Topics
Employment and earnings across groups. Employment disparities across sex, race, and education groups remain near historically narrow levels amid a solid, but not especially tight, labor market. Similarly, nominal wage growth also remains robust for most groups despite slowing from post-pandemic highs. While the benefits of a strong labor market in recent years have been broadly shared, significant disparities in absolute levels across groups remain. (See the box "Employment and Earnings across Demographic Groups.")
Federal Reserve's balance sheet and money markets. The size of the Federal Reserve's balance sheet has declined since January, as the FOMC has continued to reduce its securities holdings. Usage of the overnight reverse repurchase agreement facility was little changed, while reserve balances increased on net. Conditions in money markets remained stable. (See the box "Developments in the Federal Reserve's Balance Sheet and Money Markets.")
Monetary policy rules. Simple monetary policy rules, which prescribe a setting for the policy interest rate in response to the behavior of a small number of economic variables, can provide useful guidance to policymakers. With inflation easing and the unemployment rate staying low, the policy rate prescriptions of most simple monetary policy rules have generally declined since 2023. Currently, most rules call for levels of the federal funds rate that are within the current target range. (See the box "Monetary Policy Rules in the Current Environment.")