Timothy Gill, Chief Economist of the American Financial Services Association (AFSA), said in a newsletter that despite the Federal Reserve’s cautious stance, soft labor data and persistent inflation offer little justification for a June rate cut. However, markets still anticipate cuts later this year.
“With the Federal Reserve firmly on a wait‑and‑see footing, the path of short‑term interest rates over the next several months is heavily dependent on employment and inflation dynamics,” said Gill. “Unfortunately, the latest reports provide little for the Fed to go on. Markets are pricing in two cuts of 25 basis points each later in 2025.”
According to the newsletter, nonfarm payrolls increased by 139,000 in May 2025, marking a slight decline from the 147,000 added in April but still exceeding the average monthly job gain of the year’s first five months. The unemployment rate held steady at 4.2% for the third consecutive month, while the broader U-6 unemployment rate remained unchanged at 7.8%. Average hourly earnings grew by 0.4% month-over-month—the strongest monthly rise since January—and were up 3.9% year-over-year. On the inflation front, the Consumer Price Index (CPI) rose just 0.1% month-over-month in May, down from 0.2% in April, while year-over-year CPI edged up to 2.4%. Core CPI, which excludes food and energy prices, increased by 0.1% month-over-month and held at 2.8% annually.
The April 2025 Job Openings and Labor Turnover Survey (JOLTS) report showed job openings dropped to 7.4 million from over 12 million in early 2022, marking a significant decrease over two years. KPMG found this trend indicates a normalization in the labor market following pandemic-driven hiring surges. The Federal Reserve has acknowledged this decline as a sign of a softening employment environment.
Oil prices surged by more than 13% in June 2025 following heightened tensions in the Middle East, particularly between Israel and Iran. This increase threatens to amplify inflationary pressures, especially in energy-related consumer prices. With inflation already above the Federal Reserve’s target of 2%, such geopolitical shocks complicate monetary policy decisions.
According to the CME FedWatch Tool, there was a near certainty that the Federal Reserve would maintain current interest rates at its June meeting in 2025. Investors are pricing in two cuts of 25 basis points each by year’s end, reflecting hopes for policy easing as inflation trends stabilize. Analysts have adjusted their forecasts downward, anticipating fewer cuts than initially expected.
Gill is Vice President of Research and Chief Economist at AFSA with over two decades of experience in economic analysis across major trade associations.
