The Latest from the Fed

Rates remain unchanged... Is the world dumping Treasurys?... Nothing out of the ordinary to report yet... For better and worse... A free opportunity... Greg Diamond on war and oil...

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No surprises from the Federal Reserve...

This afternoon, the Fed announced its latest policy decision. It will leave interest rates unchanged in a range between 4.25% and 4.5%.

That wasn't a surprise. The market had already priced in a near 100% chance of the Fed leaving rates unchanged.

On the economy, the Fed said:

The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated.

In a press conference, Fed Chair Jerome Powell said that the Fed is just beginning to see the impact of tariffs on goods inflation. But he added that the duration of this impact is highly uncertain.

On slowing hiring, Powell said that there was a "cooling" in some aspects, but nothing that raises red flags just yet.

In short, Powell gave no indication that the Fed's "wait and see" approach is changing anytime soon. Powell said the Fed is "well positioned" to keep rates where they are to figure out what the economy needs.

Markets ended the day about even – with the S&P 500 Index and Dow Jones Industrial Average down slightly and the Nasdaq Composite Index up slightly.

The Fed's latest outlook...

Every three months, the Fed releases its Summary of Economic Projections – which includes the central bank's outlook for metrics like the unemployment rate, GDP growth, and inflation. It also includes a survey of where Fed voters see rates headed.

On the interest-rate front, the Fed kept its prediction of a federal-funds rate of 3.9% at the end of 2025. That represents two future rate cuts from today, matching what the market is still expecting.

Of course, that can always change depending on what goes on in the economy. Wall Street Journal reporter Nick Timiraos noted in a post on social platform X that in June 2024, the Fed only predicted one more 25-basis-point rate cut for the rest of that year – before cutting rates by a full percentage point.

Turning to the economy, the Fed's predictions aren't as rosy...

It raised its estimate for inflation in 2025 to 3% (from 2.7%), raised its expectation for the unemployment rate to 4.5% (from 4.4%), and lowered its estimate for GDP growth to 1.4% (from 1.7%).

So just like in March, the Fed is expecting higher inflation and unemployment and lower GDP growth. That doesn't paint a picture of the "solid" economy Powell outlined during his press conference. It could even mean the opposite – stagflation.

An early comment on 'too late' Powell...

Earlier today, President Donald Trump continued his jabs at Powell – almost as if he knew what was coming from the policy announcement this afternoon. He called Powell "stupid" for "probably" not cutting rates at today's meeting.

Trump pointed to the fact that the European Central Bank has continued to cut rates, while the Fed stands pat (even though the Fed cut rates by 1% last year). He also said that rates should be at least 200 basis points (2%) lower.

Trump even went as far as to ask if he was allowed to appoint himself to the Federal Reserve.

Vice President JD Vance has also gotten in on the act, saying Powell not cutting rates is "monetary malpractice."

So far, with inflation nearing its target and the labor market not breaking down, the Fed isn't backing down. And during his press conference, Powell avoided questions about his future at the Fed by saying he was focused on monetary policy.

Why the White House wants lower rates...

There's one clear reason why the White House wants rates lower... it would mean the government can refinance the $9.2 trillion in debt it has coming due this year at a cheaper interest rate. That's about 25% of all the debt the government has outstanding.

A lot of that debt was issued in 2020, when interest rates were a lot lower than they are today. The average interest rate on U.S. debt has more than doubled since 2020.

As we noted last week, interest payments on debt are now the government's third-largest expenditure. And, as financial data firm Barchart shared on X, interest payments now make up about 18% of tax revenue – the highest level since the 1990s.

According to Trump, a 200-basis-point interest-rate cut would save the government $600 billion in interest payments.

But we don't see rates falling that much anytime soon. The Fed only sees rates falling about 0.5% by the end of next year. And simply lowering rates because the government can't stop spending isn't a noble move or a long-term solution.

However, that won't stop the borrowing. And it won't stop the White House from trying to pressure the Fed (and whoever is in charge) from cutting rates.

Now, let's revisit a related topic...

Higher interest rates, and by association lower bond prices, have been in the spotlight the past few years, ever since inflation hit a 40-year high and the Fed jacked up interest rates (too late) to "fight" higher prices.

Exhibit A: Stock and bond prices fell in tandem in 2022, which a lot of people weren't used to.

Today, with Trump's trade policy and the "big, beautiful bill" sitting in Congress, investors have again (rightfully) become concerned about the value of long-term fixed-income holdings. More debt will undoubtedly lead to more Treasurys being issued to finance it, putting pressure on bond prices as questions already persist about demand.

You might recall the bond market's action after the "Liberation Day" tariff announcement, with the 10-year Treasury yield making its biggest one-week move (higher) since 2001. A lot of market observers assumed that foreign holders of Treasurys were dumping U.S. bonds in response.

That move also likely led to Trump's 90-day pause on the "reciprocal" tariffs, which was like jet fuel for the stock market while cooling bond worries. We wrote about that in our April 9 issue, the day of Trump's "90-day gift"...

When asked this afternoon if the bond market persuaded him to reverse the tariffs, he said...

I saw last night where people were getting a little queasy.

That's a telling admission to me that the health of the bond market does matter to Trump.

Remember, bond prices trade inversely to yields, so for most people, this means longer-term bonds haven't been acting as a ballast for the volatility in stocks over the past week.

We wrote that there were a few theories to consider about the bond market's behavior, but two had gotten some traction.

One came from a Bloomberg article...

Investors Fear Another Big Blowup of Basis Trade as Treasuries Lose Haven Status...

The basis trade is a strategy that hedge funds use to wager on the difference between prices of cash Treasuries and futures. Because the gap is often minuscule, investors typically borrow to multiply their bets, up to 50 or 100 times the capital invested... It can create a cascading effect that causes yields to surge, or even worse, the Treasury market to seize up, much like what occurred in 2020.

So we said that the bond market's move could be a hedge fund or funds "blowing up" with a trade gone bad.

As for the second idea, we wrote...

The second idea is that the Chinese government is retaliating against Trump's tariffs by selling its Treasury holdings or perhaps just not buying any new ones at regularly scheduled auctions this week.

It's hard to say for sure whether that's happening.

For one thing, as Stansberry Research analyst Gabe Marshank pointed out to us today, China holds only about 3% of U.S. Treasurys. So its influence on the market isn't as big as one might believe, even if it were heavily selling U.S. bonds.

We said we'd keep track of foreign demand for Treasurys since it's an incredibly important story.

So far, we haven't seen anything out of the ordinary...

While we don't have April data from the Department of the Treasury yet, we do have numbers for March, when the first of Trump's tariff threats started to go into effect.

China's Treasury holdings were around $765 billion as of March, which is down from $784 billion in February... but higher than the $761 billion it held in January. And it's around the same nominal amount it held in March 2024.

So through the first three months of 2025, we haven't seen anything out of the ordinary, which has been a trend of China gradually decreasing its Treasury holdings over the past several years.

Meanwhile, the other major foreign holders of U.S. Treasurys – Japan, the U.K., Canada, and people and institutions based in the Cayman Islands – actually increased their U.S. debt holdings in March.

Despite the start of the trade war, total foreign ownership of Treasury bills, notes, and bonds in March was around $9.1 trillion, up from roughly $8.8 trillion a month prior and $8.1 trillion a year earlier.

We'll need to see the April data before reaching a conclusion...

But given the landscape today, we're inclined to think the post-Liberation Day bond market action had more to do with hedge funds unwinding leveraged trades rather than foreign buyers dumping Treasurys en masse.

We'll check back in on this story next month. But for now, we'll repeat this from our April 9 issue...

In the meantime, a few of our analysts who discussed the subject today think the recent move in bonds has been more of a "basis trade" unwind at work.

This is probably due to the market repricing fast-changing inflation expectations (to the upside) as a result of the tariff developments over the past week.

For better and worse...

Now, with tariff pauses and trade negotiations happening with China and other countries, expectations have changed to "not as bad as it could have been" when it comes to decreased economic growth because of trade policy. But there are still lingering questions about what impact tariff policy will have.

At a minimum, a 10% across-the-board tariff on all U.S. imports could stick, with higher rates on some countries, depending on negotiations and the legality of these tariffs, which is still to be decided in the courts. The answers could shake up growth expectations.

So the bond market could get "queasy" again. But things look more like business as usual for now. That's for better (less short-term fear) and worse (more long-term debt problems). On it goes.

Our friend Pete Carmasino, chief market strategist at our corporate affiliate Chaikin Analytics, has a similar thought. He just shared his take in the free daily Chaikin PowerFeed newsletter this week, outlining precisely why China has been selling U.S. Treasurys and why it matters...

Huge sellers like China are dumping them as fewer new buyers show up. So bond sellers need to cut prices to find buyers.

When bond prices fall, interest rates rise.

That means higher costs for the U.S. government to borrow. It could also mean higher rates for folks like you and me with our mortgages, car loans, and credit-card debt.

This isn't a forecast for the U.S. government's interest expense. It's happening right now. And it's causing a lot of people to worry about what might happen next.

But he concluded "it's the normal course of business in the bond market. Trust me, I've traded bonds for more than 20 years." You can read his analysis here and here.

Give this a try...

On a related note, Pete and Chaikin Analytics founder Marc Chaikin also have something else worth checking out right now.

You might already be familiar with their excellent, easy-to-use stock rating system. Well, they've just added a new feature to it, which they're calling "the biggest investment breakthrough" in their business's history. And Stansberry Research readers can try it for free.

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U.S. markets and our offices are closed tomorrow for the Juneteenth federal holiday. Your next Digest will be from Dan on Friday, followed by more from our friends at Chaikin Analytics in our Masters Series this weekend.

New 52-week highs (as of 6/17/25): First Majestic Silver (AG), Antero Resources (AR), BWX Technologies (BWXT), CF Industries (CF), EQT (EQT), Intercontinental Exchange (ICE), Lynas Rare Earths (LYSDY), Sprott Physical Silver Trust (PSLV), iShares Silver Trust (SLV), Spotify Technology (SPOT), and United States Commodity Index Fund (USCI).

In today's mailbag, one thought about the market's reaction to the war between Israel and Iran... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"The news many times blames investors [for market reactions to things like Middle East events]... Is [Warren] Buffett in that camp, I doubt it!... I blame automated computer programs seeking any number of 1,000 negative words to drive a sell!" – Subscriber Glen D.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
June 18, 2025