INSTANT VIEW-Fed holds rates steady, but slows expected pace of future cuts

NEW YORK, June 18 (Reuters) - The Federal Reserve held interest rates steady on Wednesday and policymakers indicated borrowing costs are still likely to fall this year, but slowed the overall pace of expected future rate cuts in the face of estimated higher inflation stemming from the Trump administration's tariff plans.

In new economic projections, policymakers sketched a modestly stagflationary picture of the U.S. economy, with economic growth slowing to 1.4% this year, unemployment rising to 4.5% by the end of this year, and inflation finishing 2025 at 3%, well above the current level.

While policymakers still anticipate cutting rates by half a percentage point this year, as they projected in March and December, they slightly slowed the pace to a single quarter-percentage-point cut in each of 2026 and 2027 in a protracted fight to return inflation to the central bank's 2% target.

MARKET REACTION:

STOCKS: The S&P 500 .SPX briefly added to gains before fading and was last up 0.27%

BONDS: The yield on benchmark U.S. 10-year notes US10YT=RR was down 2.2 basis points to 4.369%. The 2-year note US2YT=RR yield fell 3.6 basis points to 3.914%

FOREX: The dollar index =USD extended declines and was down 0.23% to 98.60, with the euro EUR= up 0.3% at $1.1512.

COMMENTS:

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN:

"There’s a subtle shift in the language about the unemployment rate. They’re no longer confident that it has stabilized. The balance of risks is shifting from being in balance to being tilted towards a slowdown. Instead of watching inflation like a hawk, the Fed is shifting its gaze to the labor market. The unemployment rate will be an unreliable gauge of the health of the labor market with the immigration crackdown and decline in the labor force participation rate. Instead, Powell might pull a Yellen and start talking about a wide range of labor market indicators they’re monitoring."

MATTHIAS SCHEIBER, HEAD OF THE MULTI-ASSET TEAM, ALLSPRING GLOBAL INVESTMENTS, LONDON:

With the ongoing uncertainty around tariffs and a still-robust U.S. labor market, the Fed is taking a widely expected “wait and see” approach on rates. From our perspective, the next likely window for the Fed to lower rates will be September. We expect the Fed to potentially cut interest rates twice this year should inflation continue to drop toward its 2.0% target.

"We expect equity market performance to remain volatile and continue to favor cheaper parts of the U.S. equity market, international equities, and emerging market equities given better valuations, more fiscal and monetary stimulus likely to come, and higher valuations of a number of U.S. large-cap equities. Our outlook for higher-quality bonds remains favorable given still-attractive overall yields."