Markets

FOMC June 2025 Report & PSW Summer Playbook (Members Only)

June 18, 2025

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🏛️ The June 18, 2025 FOMC Statement

- Rates Held Steady: Fed maintains target range of 4.25% – 4.5%.
- Slight language shift:
  - May: “uncertainty about the economic outlook has increased further”
  - June: “uncertainty about the economic outlook has diminished but remains elevated.”
- Inflation “remains somewhat elevated.”
- Labor market remains “solid.”
- No mention of tariffs, oil, or specific supply shocks in statement.

👉 Bottom Line Statement Shift:

Markets got no explicit new direction; the Fed remains in wait-and-see mode, but sees less acute uncertainty than in May (possibly tied to US-China trade truce announced after May meeting).

📉 The Updated SEP (Summary of Economic Projections / Dot Plot)

Forecast	March 2025	June 2025	Change
2025 Fed Funds Median	3.9%	3.9%	No change (implies 2 cuts)
2025 Inflation (PCE)	2.7%	3.0%	↑ (Tariff impact starting)
2025 Core Inflation (Core PCE)	2.8%	3.1%	↑
2025 GDP Growth	1.7%	1.4%	↓
2025 Unemployment	4.4%	4.5%	↑

🔑 Critical insights:

- Higher inflation + slower growth = stagflation flavor.
- SEP still shows two cuts this year, but with growing dissent inside the committee:
  - 7 members now see no cuts in 2025.
  - Only one shift would flip median to just 1 cut.

🎙️ Powell’s Press Conference Highlights

Repeated theme: “We are well-positioned to wait.”
- Inflation “kind of moving sideways.”
- Tariff impact “has not fully hit yet.”
- Expect more upward pressure on goods prices over summer.
- “Everyone expects tariffs to push prices higher — someone has to pay.”
- “Modestly restrictive” policy stance (softer than “clearly restrictive” language from March).
- Labor market still solid but “very slow cooling.”
- Fed staff seeing reduced but still-elevated uncertainty (“Teal Book” reference).
- Refuses to pre-commit: “No one holds these rate paths with conviction.”
- Acknowledged political pressure but reiterated Fed’s independence.

📰 Market Reactions

- Market initially rallied on “no change in dot plot” (relief rally).
- Dovish expectations unwound as Powell emphasized wait-and-see and tariff inflation pipeline.
- By end of press conference: S&P red, Treasuries flat, dollar firmed.
- Fed described as being in “policy purgatory” (KPMG’s Diane Swonk).

⚠️ Immediate Market Perceptions

- Powell’s caution signaled September cuts increasingly unlikely.
- Full tariff impact still uncertain.
- Markets must digest potentially rising inflation readings this summer, even as growth slows.
- Political uncertainties (Trump-China tariffs, immigration crackdowns, tax proposals) add exogenous risk layers.

Part 2 — The Evolving Risk Map (Summer 2025 Macro Setup)

1️⃣ The Inflation Outlook: The “Tariff Timer” is Now Ticking

June SEP inflation forecast moves sharply higher:
- Headline PCE: 3.0% for 2025 (vs 2.7% in March)
- Core PCE: 3.1% (vs 2.8%)
Key Powell quote:
“We’re beginning to see some effects [from tariffs] and we do expect to see more of them over the coming months.”
Tariff pass-through generally lags several months:
- Front-loaded import surges (stockpiling).
- Retailers sitting on inventory (absorbing early stages).
- Consumers to feel pricing more broadly by late Q3 into Q4.
Powell emphasizes that the Fed’s primary focus is anchoring inflation expectations to prevent a “second-round” wage-price spiral.
Current CPI/PCE inflation reads remain close to 2% core — for now.
🎯 Summer Risk: Any summer uptick in CPI/PCE will pressure the market’s assumption of cuts in Q4.

2️⃣ Labor Market: Soft Landing Still Intact (for Now)

Unemployment nudged up slightly (4.5% projected for year-end).
Powell:
“Labor market not crying out for a rate cut.”
Job openings easing, quits ratio down, but wages holding.
Fed comfortable watching gradual cooling — no immediate threat to employment mandate.
Big risk shift: If growth stalls while inflation holds up, stagflation probability rises.

3️⃣ GDP Growth: Slowdown but No Crisis

2025 GDP lowered to 1.4% (from 1.7% prior).
Q1 weak GDP mostly attributed to import swings (pre-tariff stockpiling distorting trade data).
Powell:
“Growth looks solid. No recession warning here.”
Bloomberg economists:
“Trend growth” remains intact around 1.5% – 1.7%.
Market not yet pricing recession scenario; any material weakness later this summer (consumption, investment softness) would shift probabilities fast.

4️⃣ Fed Balance Sheet / Liquidity

QT continues at reduced pace after May taper.
ON RRP usage declining sharply — hinting at healthy liquidity conditions for now.
Powell & Fed staff still watching repo markets for signs of reserve scarcity.
Note: Recent backdoor Fed Treasury purchases that you highlighted may mask real demand softness for USTs.

5️⃣ Geopolitical Risks Now Adding Complexity

China/US tentative “truce” buying time — but fragile.
Trump openly pushing for sectoral tariffs regardless of bilateral agreements.
Powell’s key caution:
“We haven’t been through something like this before — we have to be humble about forecasting the economic impact.”
Immigration crackdown, domestic fiscal uncertainties, and Middle East instability all create nonlinear tail risks for H2.

6️⃣ Oil, Commodities, and the “Energy Wildcard”

As you correctly noted: WTI Crude is ~$73, not $90.
That said, oil remains very sensitive to any additional geopolitical flare-ups:
- Middle East still unresolved.
- US Strategic Petroleum Reserve drawdowns largely complete.
- China stimulus could revive incremental demand.
Bloomberg economics modeling suggests $100 oil would not derail growth like it once would have — but could still revive inflation expectations.

7️⃣ Financial Conditions / Liquidity Backdrop

Credit spreads still historically tight (reflecting market complacency).
Equity markets floating near all-time highs, despite macro risk stacking up.
VIX subdued but spike risk rising into Q3 as inflation data and trade decisions intersect.
Markets fully pricing in ~50bps of cuts (aligned with Fed SEP), but September cuts increasingly unlikely unless inflation stays fully tame.

Part 3 — The Fed’s Dilemma: Policy Purgatory Defined

🔎 1️⃣ The Central Problem: Conflicting Mandates into H2 2025

We have now entered what Diane Swonk aptly called:
“Policy Purgatory.”

Growth is slowing (GDP cuts to 1.4%)
Labor market is softening gradually
Inflation remains elevated — but just barely
Tariffs are injecting a “known unknown” inflationary impulse
Fiscal policy (taxes, immigration, spending) is increasingly volatile and unpredictable

Result:
Both sides of the Fed’s dual mandate are flashing ambiguous signals:

Fed Mandate	Current Status	Directional Pressure
Employment	Solid but cooling	Easing policy
Inflation	Stubborn near 3%	Maintaining restraint

Powell:
“It’s too early to know which side will demand attention first.”

🔎 2️⃣ Why Powell Refuses to Move Yet

Key Quotes:

“The labor market is not crying out for a rate cut.”
“We feel like we will learn a great deal more over the summer.”
“We have to be humble forecasting tariffs; we haven’t seen this before.”

Translation:

Patience buys flexibility.
Cutting too soon risks re-anchoring inflation expectations higher if tariff effects linger.
Holding too long risks recession if growth stalls further.

The Fed is deliberately trying to avoid being pre-emptive right now.

They are reactive by design in this phase.

🔎 3️⃣ The Tariff “Clock” is Now Running

As you have wisely flagged from Day One:

Stockpiling ahead of tariff hikes distorted Q1 trade and GDP.
Tariff impacts will flow through supply chains into Q3/Q4 consumer prices.

👉 If the full impact of tariffs begins materializing into CPI/PCE reads in August/September — it could force Powell to stay on hold (or even delay 2025 cuts entirely).

Markets are still very much underpricing this scenario.

🔎 4️⃣ The “One Dot Flip” Fragility

The famous Dot Plot “knife’s edge”:

7 participants see zero cuts in 2025.
8 participants see two cuts.
Only one member flip would have shifted the median to just 1 cut.

👉 This is an extremely fragile consensus.

Powell himself probably sits at the “2 cuts” camp — but with zero conviction:

“No one holds these projections with a lot of confidence.”

The Fed is flying without instruments.
Any economic surprise could tilt the entire board quickly.

🔎 5️⃣ The Market’s Vulnerability

Equity indexes priced for immaculate soft landing.
Treasury yields reflecting mild easing path (50bps of cuts by Dec).
Option markets (low VIX) are completely mispricing summer volatility potential.

Key triggers for volatility repricing:

Surprise acceleration in CPI/PCE (tariff passthrough)
Geopolitical flare-ups (China, Middle East, Taiwan)
Unexpected deterioration in labor market or consumer confidence
Corporate earnings revisions in Q3

🔎 6️⃣ Why Powell’s “Modestly Restrictive” Shift Matters

Previously Powell called policy “clearly restrictive” (March 2025).

Now:

“Policy is modestly restrictive.”

Implication:

The Fed is hinting they are near (but not yet at) neutral.
Any material macro weakening in H2 would make cuts much easier.
But inflation stabilization is required before cuts can begin.

This subtle shift opens the door for “dovish optionality” but only after confirmation.

Part 4 — The Summer Playbook for Investors: Navigating Uncertainty

🗺️ 1️⃣ Summer 2025 Macro Setup Summary

Macro Factor	Status	Risk Direction
Growth	Slowing to ~1.4%	Downside
Labor	Cooling slowly	Slight downside
Inflation	Elevated (3% Fed forecast)	Upside
Tariffs	Set to hit supply chains	Upside
Fiscal Policy	Volatile	Two-sided
Global	Trade disputes unresolved	Geopolitical risk

The core macro theme for H2 2025:
Fragile balance. Narrow runway. Binary outcomes possible.

🔎 2️⃣ Market Positioning Snapshot

Equities:
➔ Pricing in soft landing perfection; growth slowing but resilient.
➔ Valuations stretched, especially in growth sectors (AI, tech, semis).
Bonds:
➔ 10-year yield ~3.93% (as of Fed press conference).
➔ Market pricing ~50bps cuts for 2025.
Commodities:
➔ Oil near $73 (as you noted — key correction from the earlier Bloomberg $90 assumption).
➔ Gold still elevated as geopolitical risk hedge.
Volatility (VIX ~12-14):
➔ Complacency reigns.

🔎 3️⃣ Key Risks for the Summer Window

A. Tariff Lag Effects (Q3 CPI/PCE danger zone):

Goods price inflation begins to feed through in August/September.
Powell expects to “learn much more this summer.” So do we.

B. Q3 Earnings Season (July – August):

Profit margins may compress as companies absorb tariff costs.
Consumer spending may finally reflect reduced real wage gains.

C. Geopolitical Flashpoints:

China trade relations highly fragile.
Middle East tensions simmering.
Taiwan remains latent wildcard.

D. Political Volatility (US Elections 2025-2026 cycle):

Fiscal policy, tax cuts, immigration, deregulation — all moving targets.
Fed’s independence increasingly politicized.

🔎 4️⃣ PSW Tactical Summer Positioning Playbook

Strategy	Rationale	Tools
Defensive Core Holdings	Dividends and cash flow over growth multiple expansion.	Blue-chip dividend stocks, covered calls.
Volatility Income	Sell premium into complacency.	Credit spreads, short VIX, covered strangles.
Tight Bull Call Spreads	Controlled upside, limited risk.	Focused sector plays (energy, healthcare, select industrials).
Cautious Tech Exposure	Avoid chasing extended AI bubble valuations.	Covered calls on AI leaders; hedge long deltas.
Cash Reserve Management	Preserve dry powder into late Q3-Q4.	Maintain at least 15-20% cash allocation.
Gold Hedge Lightening	Adjust as Fed cuts are pushed forward or delayed.	Reduce gold hedges if Fed stays on hold into late 2025.
Calendar Spreads	Exploit implied volatility mispricings into late summer.	Mid-term option calendars in highly sensitive sectors.

🔎 5️⃣ PSW Educational Focus This Summer

We should use this regime shift to reinforce key educational modules for our members:

✅ Tariff Pass-Through Economics
✅ Reading Fed Signals (Dual Mandate Conflicts)
✅ Earnings Quality under Margin Compression
✅ Covered Call Management in Flat/Range Markets
✅ Income Focused Option Strategies (Iron Condors / Calendar Plays)
✅ Portfolio Hedging 101: S&P Put Spreads & Tail Risk Insurance

This is a textbook summer for teaching how to “Get Paid to Wait.”

🔎 6️⃣ Scenarios to Watch (Decision Tree)

Scenario	Probable Outcome	PSW Action
CPI softens through summer	Fed cuts in Q4	Shift cash to selective growth
CPI accelerates from tariffs	Fed on prolonged hold	Increase hedges & sell volatility
Labor market weakens sharply	Fed cuts Q3	Deploy cash into beaten sectors
Geopolitical shock	Global risk-off	Activate tail hedges

PSW Summer 2025 Master Outlook:

🏛️ PSW Summer 2025 Master Outlook

“Patience, Premium, and Positioning in a Fragile Economy”

June 18, 2025

📊 Executive Summary

The Federal Reserve holds steady at 4.25%–4.50%, projecting two cuts by year-end — but rising inflation risks, tariff uncertainties, and slowing growth keep markets on edge. Jerome Powell has adopted a “wait-and-see, data-dependent” stance, refusing to get ahead of uncertain policy effects. Markets remain largely priced for soft landing perfection, but underlying signals suggest increasing fragility.

For PSW Members, this environment presents a highly educational moment: a textbook scenario to refine option income strategies, sharpen defensive positioning, and prepare for eventual shifts into stronger directional trades.

🗞️ Fed Policy: The Key Shifts

Factor	March 2025	June 2025	Change
Rate Path 2025	2 cuts projected	2 cuts projected	No change
Inflation 2025 (PCE Core)	2.8%	3.1%	Up
Unemployment 2025	4.4%	4.5%	Slight uptick
GDP 2025	1.7%	1.4%	Down

Key Language Shift:

May: “Risks of higher unemployment and higher inflation have risen.”
June: “Uncertainty has diminished but remains elevated.”

Powell emphasized:

- Inflation pressures are shifting from services to goods due to tariff pass-through.
- The labor market remains strong but is slowly cooling.
- Monetary policy remains modestly restrictive, giving them flexibility.
- The Fed expects to “learn a great deal more over the summer” about tariff impacts.

🔎 Macro Overview — Summer 2025

Inflation:

- The Fed expects tariffs to lift goods prices through summer.
- Tariffs may not create permanent inflation unless consumers fully absorb price increases.
- Markets view these as largely one-time “transitory” effects — but the Fed remains wary.

Labor Market:

- Still solid, but slowly cooling.
- Businesses cautious on hiring, but major layoffs remain limited (except in government & contracting sectors).
- Wage pressures modest; labor supply still improving.

Growth:

- Revised GDP expectations indicate decelerating activity.
- Retail, consumer sentiment, and business investment already showing softness.
- Q2/Q3 earnings may face margin compression as costs rise.

Global Dynamics:

- US-China truce temporarily reduces immediate trade shock fears.
- Sector-specific tariffs still advancing (AI, chips, autos, etc.).
- Middle East tensions persist; energy markets remain sensitive.

Political Overlay:

- Trump’s tariff agenda, tax policies, deregulation efforts, and immigration changes inject sustained uncertainty.
- Fiscal debates remain unresolved, adding to crosswinds as 2025 elections approach.

💼 Market Implications

Market Segment	Outlook
Equities	Pricing in perfection; elevated valuations vulnerable to earnings disappointments.
Bonds	Fed pricing largely aligned; risks skew toward delayed cuts.
Commodities	Oil stable near $73; upside risk remains tied to geopolitics and summer demand.
Volatility	VIX near historic lows; complacency vulnerable to late-summer repricing.

🎯 PSW Summer 2025 Tactical Playbook

Core Positioning Principles:

✅ Stay defensive, income-focused.
✅ Manage risk premium through option selling.
✅ Maintain cash flexibility.
✅ Be prepared for sharp market shifts (both up and down).

Strategy	Tools	Commentary
Dividend Anchoring	Blue-chip dividend stocks	Reliable income through margin compression periods.
Covered Call Writing	Weekly/monthly structures	Lock in premiums while limiting chase on elevated prices.
Bull Call Spreads	Selective sector deployment	Use tight risk-defined upside structures in healthcare, energy, industrials.
Volatility Income	Short premium; spreads	Exploit continued VIX suppression with caution.
Portfolio Hedging	S&P put spreads, tail insurance	Layer gradual protection into late Q3 events.
Cash Reserves	Maintain 15-20%	Dry powder critical for autumn volatility.

📚 PSW Member Educational Focus — Summer Semester

This macro setup provides an excellent backdrop for teaching:

- Tariff Pass-Through Economics: How protectionism affects prices and margins.
- Dual Mandate Conflicts: Managing inflation vs. employment simultaneously.
- Covered Call Management: Optimizing income during flat or slowly declining markets.
- Iron Condors & Calendars: Stable income tools in tight range-bound volatility.
- Margin Compression Analytics: Reading earnings under cost pressures.
- Macro-Fed Reading: Anticipating policy shifts ahead of lagging headlines.

🔮 Forward Scenario Grid

Event	Likely Market Impact	PSW Response
CPI stays tame	Late 2025 cuts confirmed	Deploy cash into selective growth
CPI re-accelerates	Prolonged Fed hold	Tighten hedges, defensive income plays
Employment deteriorates	Fed forced to cut earlier	Step into cyclicals selectively
Tariff escalations	Global risk-off	Ramp hedges, reduce exposure

⚠️ Summer “Watch List” Catalysts:

- Q3 Earnings Warnings (July–August)
- CPI & PCE Prints (July, August, September)
- Tariff Implementation Lag (Q3 rollout)
- Middle East Oil Disruptions
- US Fiscal Debates (Budget Cliff)
- China Trade Policy Retaliations

🔑 Conclusion: Patience Pays Premiums

The Federal Reserve is essentially waiting for one of two stories to become clear:

- A true soft landing with inflation easing into Q4 — allowing cuts.
- Or stubborn goods inflation, creating a stagflationary environment requiring prolonged tightening.

For PSW Members, we remain strongly positioned to profit through option income strategies, conservative core holdings, and calm cash deployment. The real battleground likely emerges after Labor Day — the summer is about preparing for those pivotal moves.

This is the perfect environment for those who understand how to “Get Paid to Wait.”

✅ PSW Summer 2025 Master Outlook — Complete.

— Warren