Weekly Investment Update (06/20/2025)

Markets held firm this week, trading sideways even as headlines delivered potential catalysts for volatility. Investors absorbed the outcome of the June 18 Federal Open Market Committee meeting, where policymakers left rates unchanged and maintained a cautious stance on inflation. Meanwhile, geopolitical risks persisted amid renewed conflict in the Middle East. Despite these crosscurrents, equity markets proved remarkably resilient — likely a reflection of solid underlying fundamentals and growing confidence that the Fed is edging closer to easing.

Economic data painted a mixed picture, particularly around the consumer. Retail sales slowed in recent months, growing 2.1% annualized in the three months through May, trailing the 6.1% pace of aggregate wage growth. The personal savings rate rose to 4.9% in April from 3.5% at year-end, suggesting consumers are exercising caution. Still, strong income gains and a solid labor market — despite a modest uptick in jobless claims — leave room for spending to rebound if macroeconomic headwinds such as tariffs or energy prices begin to ease. While some recent data may appear stagflationary, we believe inflationary pressures are likely to prove transitory, with core trends — especially in shelter — continuing to ease. Against this backdrop, interest rates appear biased lower, with the Fed likely to cut later this year.

Fed Holds Steady Amid Tariff Uncertainty, Signals Cautious Path Forward

What is happening: The Federal Reserve left interest rates unchanged in the 4.25%–4.50% range, aligning with expectations. Alongside its decision to hold rates steady, the Fed released an updated Summary of Economic Projections showing slightly higher forecasts for inflation and unemployment, along with a softer outlook for growth. Notably, the Fed now anticipates a more gradual rate-cutting cycle extending into 2026 and 2027.

While Fed Chair Powell acknowledged that the labor market remains healthy and is cooling only gradually, much of the discussion centered on expectations for a meaningful pickup in inflation due to newly imposed tariffs. He emphasized considerable uncertainty around their magnitude, duration, and broader economic impact — reinforcing the Fed’s commitment to a data-driven approach over the coming months.

Why it matters: The Fed’s stance remains consistent. Current conditions give it room to pause, particularly amid fiscal uncertainty. Despite projecting core PCE inflation above 3% in 2025, the Fed still projects 50 basis points of cuts this year — signaling that Fed officials view tariff-related inflation as temporary.

The Fed continues to balance its dual mandate of employment and inflation, but we continue to believe the employment side will take priority should the labor market show deterioration. Interest rates are still restrictive, and Powell clearly stated that current data suggest a lower policy rate may ultimately be appropriate. Greater clarity on the inflationary impact of tariffs would likely give the Fed more conviction to resume interest rate cuts. So far, there is little evidence that tariffs are meaningfully lifting overall inflation.

Geopolitical Tensions Pose Risks of Escalation, Economic Impact Is Likely Muted

What is happening: Hostilities between Israel and Iran have intensified, with Israel targeting Iran’s nuclear infrastructure and senior military personnel. In retaliation, Iran launched a wave of ballistic missiles, with some penetrating Israel’s defense systems.

The risk of broader regional escalation remains high. While the prospect of U.S. intervention is uncertain, diplomatic efforts are underway. Foreign ministers from the U.K., France, and Germany met with their Iranian counterpart today in Geneva to negotiate a framework for de-escalation. Discussions reportedly aim to reinstate monitoring of Iran’s nuclear program and achieve concessions around its stockpiling of ballistic missiles.

Why it matters: The conflict is undoubtably devastating and tragic, and our thoughts remain with those affected. From an economic standpoint, the impact appears limited for now. Oil prices surged initially but remain within a manageable range. Additionally, many economies globally are now far less oil-intensive, softening any potential blow to growth.

Moreover, while Iran accounts for roughly 3% of the global oil supply, its real leverage lies in the Strait of Hormuz — a critical waterway through which about 20% of global oil and gas flows. Although we do not expect Iran to close the Strait, such a scenario would exert upward pressure on oil prices. However, the U.S. economy is relatively insulated. It has been energy independent since 2019 and is a net exporter of oil. While not immune to price shocks, the U.S. is better positioned to weather volatility than in past decades. If prices were to rise persistently, domestic producers would likely ramp up output to offset some of the impact.

Although higher oil prices also pose risks to short-term inflation expectations as consumers face higher gasoline prices, spending on energy as a percentage of disposable income is currently at 3.4%, near record lows. While the situation remains fluid, we continue to expect the worst-case scenario will be avoided.