Federal Reserve statement explained – June 2025

The Federal Reserve (Fed) held the target for the federal funds rate at 4.25% — 4.5% on Wednesday. Although the market expects rate cuts at some point later this year, the Fed has delayed this move, largely to see what effect (if any) tariffs have on inflationary pressures.

Economic conditions

The Fed has a dual mandate to set conditions for maximum employment and promoting price stability. It can be a catch-22 because the federal funds rate – the main tool the Fed uses to influence interest rates and inflation – also influences the labor market because businesses base decisions on the cost of funding operations.

In walking this fine line, the Fed looks at inflation as well as labor market data to inform policy decisions.

On the inflation side, the Fed’s preferred metric is the Personal Consumption Expenditures index from the Bureau of Economic Analysis. The latest reading for April showed prices were up 0.1% for the month and 2.1% for the year. The Fed has set its long-term policy goal at 2% inflation per year.

Central banks like the Fed often want to see some inflation because it encourages people to make purchases now rather than waiting, which helps keep the economy humming. But too much inflation devalues funds consumers currently have on hand, so it’s a balancing act.

The Fed has been holding rates for a while now, waiting to see what effect tariffs have on inflation, although these effects may be delayed based on businesses still selling existing inventory that wasn’t subject to tariffs. Negotiations between the U.S. and other countries as well as changing administration policy mean it’s a fluid situation.

When it comes to the labor market, the Fed looks at a variety of reports around the state of labor and business conditions. One of the primary overviews of the entire labor market is the Employment Situation report from the Bureau of Labor Statistics.

The latest report showed that the unemployment rate held steady at 4.2% in May, up marginally from 4% a year ago. The labor force participation rate ticked down from 62.6% in April to 62.4% in May.

Weekly claims for unemployment insurance represent a more real-time snapshot of conditions in the labor market because initial claims show how many people filed in a given week, while continuing claims show the portion of the population that continues to file after the initial week.

One key point in the most recent report for the week ending June 7 is that the 4-week rolling average of continuing claims was about 1.915 million. According to the Department of Labor, the average is at its highest point since the week of November 27, 2021, a possible indication that work is becoming more difficult to find.

Federal funds rate projections

Once a quarter, the Fed makes projections as to where it sees the federal funds rate going, along with a range of economic indicators. The June projection for 2026 shows the being 3.9%. For that to be the case, that would likely mean two 0.25% target rate cuts for the remainder of the year. That matches market expectations.

Going into 2026, the federal funds rate is predicted slightly higher than the March number, which matches up with the fact that officials see core PCE inflation running higher. The inflation projection for next year is 2.4% now as opposed to 2.2% in March. The federal funds rate projected number is 3.6% vs. 3.4% in the last release.

What this means for home buyers

Mortgage rates aren’t directly tied to the federal funds rate. Rather, they correlate more with the movements of the 10-year U.S. Treasury. Historically, the 30-year fixed mortgage rate is about 2% higher than the 10-year Treasury.

But mortgages are traded in the bond market and when rates go up or down for other investments, the yields on the mortgage-backed securities (MBS) that underlie mortgage rates go up as well. There is a direct correlation between the yield on MBS and your mortgage rate. They go up or down together.

However, it’s important to note that mortgages are packaged into MBS and sold on the bond market 2 months or more after you close on the mortgage. This means the rate you get today isn’t a reflection of conditions in today’s market. Rather it’s a reflection of market expectations for where rates will be in the near future.

If you see a rate you like today, go ahead and lock. It protects you from upward movement in the future and you may be able to put a winning offer on the house you want while there’s less competition. Focus on the payment more than the rate itself. You can always look to refinance if the pendulum swings and rates fall.

What this means when refinancing

If you’ve been considering refinancing, rate stability is the next best thing to a rate drop. Accessing your home equity to consolidate debt or do home improvements may offer a better interest rate than you would get through personal loan or credit card financing. Just make sure you can afford the payment.

If you feel like you’re ready to buy a home or refinance your current one, get your application started.