Market Note: The Fed Remains Unresponsive

By Hightower Great Lakes on June 23, 2025

The Fed Stays Put

As expected, the Federal Reserve decided to keep interest rates unchanged for the fourth consecutive meeting. They remain in “wait-and-see” mode as they continue to monitor inflation, the labor market, and ongoing uncertainties from tariffs (which we believe will be less inflationary than expected), as well as the conflict in the Middle East.

Federal Reserve Chairman Jerome Powell acknowledged that inflation has eased but remains “above their target.” The Federal Reserve dot plot, which tells us where Fed officials see interest rates heading in the future, shows us that policymakers still expect to cut rates twice in 2025.

Federal Reserve Governor Christopher Waller asserted that the central bank can lower interest rates “as soon as next month,” and we agree. The latest CPI/PPI data shows a clear slowdown in inflation. CPI hovers around 2% compared to 9% three years ago. Tariffs seem much less threatening compared to previous months, with negotiations progressing and deals being formed.

The economy remains resilient, with the Atlanta Fed Tracker running around 2% growth so far this year, setting up for strong earnings growth moving forward. The upcoming week will be important in determining the Federal Reserve’s direction.

Personal Consumption Expenditure (PCE) data will be released next Friday, which is the Fed’s favorite gauge of inflation. We expect PCE to hover around 2-3% y/y, which should show the Fed that inflation is under control, and they should begin to cut rates.

U.S. initial jobless claims remain low. However, we have seen a clear inch higher over the past couple of weeks. While we emphasize the importance of smoothing this number out over time, the four-week moving average has now ticked up to ~240k.

While still a calm figure and well below recessionary periods of 350-375k, we will continue to monitor its level as we move through the year. We believe 260k is a key level to watch. If reached, we would become concerned regarding more persistent layoffs. A weakening labor market should give the Federal Reserve an even freer hand to move rates lower, driving our belief that the Fed should begin to cut.

U.S. equities were mixed for the week, with volatility being dominated by Israel and Iran headlines. The S&P 500 ended down 0.15%, the Nasdaq ended up 0.21%, and the Dow Jones ended up 0.2%. Outperformers for the week included energy, technology and financials.

It’s important to remember that global equities are still up ~20% from their April lows. In the near term, a choppy, sideways market is nothing that should raise concern.

Currently, investors remain reactive to ongoing headlines relating to tariffs and developments in the Middle East. Over the next few weeks, we are hopeful that things will calm down, and negative market reactions will be seen as buying opportunities in the long term. 

Chart 1: Consumer Price Index Cooling[1]

Middle East in Focus

Over the past couple of weeks, we have seen the ongoing conflict between Israel and Iran reach new heights, as Israel launched a series of airstrikes on Iran. Israel has maintained that it will continue the barrage to prevent Iran from obtaining a nuclear weapon.

A week into the war, the two sides have been engaged in firing missiles and drones back and forth, triggering a tit-for-tat cycle of bombing between the two countries.

Initially, the U.S. remained idle in becoming involved in the conflict. Rumors circulated that Iran would attack U.S. locations nearby if it decides to enter the war and back Israel, but that remains to be seen. Before the weekend, President Trump stated that he would make his decision on whether to get involved in the war “within the next two weeks.”

We saw this decision being made quickly in just a couple of days. Late Saturday evening, President Trump announced that the U.S. military carried out a massive precision strike on three key nuclear assemblies in Iran: Fordo, Natanz, and Isafahan.

In his national address, he stated that the U.S. objective was the destruction of Iran’s nuclear enrichment capacity and a stop to the nuclear threat posed by the world’s number one state sponsor of terror.

Trump noted the attack as a “spectacular military success.” President Trump later warned Iran against retaliating, noting that any retaliation would be met with “force far greater than what was witnessed tonight.”

As aforementioned, while the ongoing Middle East conflict has escalated, we remain hopeful that a resolution will come soon. The Strait of Hormuz remains crucial for energy prices, as 20% of the world’s oil is transported through the narrow channel.

If Iran decided to close the channel, that would certainly spark a surge in energy prices and negatively impact inflation. We will continue to monitor; Iran’s response to the recent U.S. strikes will be critical in determining the direction of the war and energy prices moving forward.

Chart 2: Strait of Hormuz, a crucial passage for oil and gas transport[2]

AI Investment Continues

We continue to see a substantial effort by large organizations to support data center growth and AI initiatives. Virtually all tech giants have recently announced massive investments in hyperscale data centers and related AI technology.

The total investment by these tech leaders will likely exceed one trillion dollars over the next decade. There are plans to build large-scale data facilities, invest in infrastructure, and construct microchip manufacturing facilities in the U.S. and around the world.

Just this month, Amazon (AMZN) announced over $30 billion in combined investments in Pennsylvania and North Carolina. $20 billion will be allocated to develop “AI innovation campuses” in Pennsylvania, and $10 billion to build out data center capacity in North Carolina.

They also announced a partnership with South Korea, where Amazon will invest four billion to build a data center, marking the country’s largest to date. Finally, Amazon will also invest $20 billion from 2025 to 2029 to expand, operate, and maintain its data center infrastructure in Australia.

While Meta (META) has made it apparent on their willingness to spend on AI, having committed to spending up to $65 billion on AI infrastructure alone in 2025, they have recently been going all-in on AI deals.

Meta finalized a $14.3 billion investment to buy 49% of Scale AI, whose leader, Alexandr Wang, is also joining a “super team” being assembled by CEO Mark Zuckerberg to pursue artificial general intelligence. Meta has also been attempting to boost its talent, with reports that they are offering $100 million signing bonuses to top engineers at OpenAI to join their team.

Zuckerberg recently spoke about how “AI is transforming everything we do,” while also upping Meta’s capital expenditure range for the year to $64-72 billion from between $60-65 billion previously.

Data centers will increasingly remain the backbone of the digital economy, and their capacity must be scaled to meet the ever-increasing demand for data processing, storage and computing power.

Capex spending ensures the infrastructure can handle the workloads and support business expansion. We remain optimistic that data center expansion, power infrastructure, and AI demand will continue to expand and drive significant growth as the AI race continues.

Chart 3: Consensus Capital Expenditures[3]

Fixed Income

Last week, U.S. Treasury yields experienced a modest decline across the yield curve, influenced by heightened geopolitical tensions in the Middle East and expectations of a continued Federal Reserve policy rate hold. By week’s end, the 2-, 10-, & 30-year yields were lower by 4, 2, & 0 basis points, respectively.

The FOMC held the policy rate at 4.5% for the fourth consecutive meeting on Wednesday. Alongside this week’s GDP and PCE data releases, geopolitical tensions and market volatility remain at the forefront following US airstrikes on three Iranian nuclear facilities over the weekend.

Credit markets experienced a sell-off amid heightened geopolitical tensions between Israel and Iran. Investment-grade spread widened 2 basis points to +130, and high-yield spreads expanded 4 basis points to +354.

In terms of credit quality, the main rating agencies downgraded ratings 42 times and upgraded them 34 times last week. Consumer Discretionary led with the most downgrades, while Energy led with the most upgrades.

Tax-exempt yields were lower across the curve by 1-4 basis points, following the Treasury market. There is expected to be $33 bn in tax-exempt reinvestment capital over the first two weeks of July, which would be the highest of the year. Added to inflows, cheaper valuations, and still elevated rates, this should create a welcoming market.

The Week Ahead

Economics – Monday: PMOI Composite, Existing Home Sales; Tuesday: FHFA Home Price Index, Consumer Confidence; Wednesday: New Home Sales; Thursday: Durable Orders, Initial Claims, Wholesale Inventories, Pending Home Sales; Friday: PCE, Michigan Sentiment

Earnings – Monday: FDS; Tuesday: CCL, FDX; Wednesday: RJF, GIS, PAYX, MU; Thursday: MKC, WBA, MKC, NKE

Return for Selected Indices^[4]

Click here to read last week’s Market Note (6/16).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

---

[1] Source: Forbes, As of June 11, 2025.

[2] Source: CNBC, As of June 21, 2025.

[3] Source: Bloomberg, As of June 17, 2025.

[4] Source: Bloomberg. As of June 23, 2025