Iran-U.S. Ceasefire Agreement Advances as Fed Holds Rates Steady and Reshapes Policy Framework

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Summary:

The United States has released the official text of the memorandum of understanding reached with Iran; the Federal Reserve has launched a reform initiative, with Chair Warsh proposing five working groups to overhaul the central bank's framework.

Highlights

1. U.S. releases the official text of the memorandum of understanding with Iran.

2. Federal Reserve keeps interest rates unchanged and removes language hinting at future rate cuts.

3. Fed launches reforms as Chair Warsh proposes five working groups to reshape the central bank's framework.

4. U.S. retail sales in May rise more than expected.

5. U.S. crude oil inventories fall by 8.26 million barrels last week.

Details

U.S. Releases Official Text of Memorandum of Understanding with Iran

According to CNN on June 17, a senior U.S. government official read to the media the official text of the memorandum of understanding reached between the United States and Iran, titled the Islamabad Memorandum of Understanding Between the United States of America and the Islamic Republic of Iran. The document contains 14 provisions detailing the reopening of the Strait of Hormuz, the easing of certain financial restrictions on Iran, and the objectives for future technical talks aimed at resolving the Iranian nuclear issue.

Under the memorandum, the United States and Iran agreed to immediately and permanently cease all military operations on all fronts, including Lebanon, and pledged not to engage in future military actions against each other. A final agreement is expected to formally confirm the permanent end of conflicts across all fronts, including Lebanon. Both sides also committed to negotiating and reaching a final agreement within 60 days.

The United States pledged to begin lifting its maritime blockade on Iran immediately after the signing of the memorandum, with the blockade to be fully removed within 30 days. Washington also committed to withdrawing its forces from areas surrounding Iran within 30 days after the conclusion of a final agreement.

In addition, the United States promised to work with regional partners to invest at least $300 billion in Iran's reconstruction and economic development, with the implementation mechanism to be finalized within 60 days as part of the final agreement. Washington also pledged to terminate sanctions against Iran and release Iranian funds and assets that have been frozen or restricted.

Iran, for its part, agreed to ensure the free and safe passage of commercial vessels between the Persian Gulf and the Gulf of Oman during the 60-day period and to begin mine-clearing operations within 30 days.

Iran reiterated that it would neither acquire nor develop nuclear weapons, and both sides agreed to conduct on-site dilution of Iran's enriched uranium under the supervision of the International Atomic Energy Agency (IAEA).

Previously, a senior U.S. official stated on June 15 that the memorandum had already been signed electronically and that a formal signing ceremony would be held in Switzerland on June 19. However, U.S. President Donald Trump said during a press conference in France on June 17 that the memorandum could be signed on either June 18 or June 19. Iran's official news agency, IRNA, also published the full text of the document on the evening of June 17 local time.

Fed Holds Rates Steady and Removes Language Hinting at Future Rate Cuts

The Federal Reserve announced that it would keep the target range for the federal funds rate unchanged at 3.50%-3.75%, marking the fourth consecutive meeting this year at which rates have remained unchanged, in line with market expectations.

The latest dot plot revealed a split among policymakers regarding whether further rate hikes would be needed by the end of 2026. Of the 18 officials submitting projections, nine anticipated additional tightening. The median rate forecast for 2026 rose to 3.75% from 3.4% in March, while the median projection for 2027 stood at 3.6%.

According to the Summary of Economic Projections (SEP), the median federal funds rate is expected to reach 3.8% in 2026, up from the previous estimate of 3.4%, implying that the FOMC sees at least one additional rate hike as necessary. The median forecasts for 2027 and 2028 were raised to 3.6% and 3.4%, respectively, while the long-run rate remained at 3.1%.

The SEP projected real GDP growth of 2.2% in 2026, down from 2.4% previously, while growth forecasts for 2027 and 2028 were set at 2.3% and 2.2%, respectively. Long-term growth was estimated at 2.0%.

Core PCE inflation was projected at 3.3% in 2026, significantly above the 2.7% forecast in March, with projections of 2.5% for 2027 and 2.1% for 2028.

The Fed streamlined its policy statement by removing references to possible future rate adjustments and reiterated its commitment to achieving price stability. Despite elevated uncertainty stemming from factors such as Middle East tensions, the central bank noted that economic activity continues to expand at a solid pace, supported by strong productivity growth and capital investment. Employment growth remains broadly aligned with labor force growth, while inflation remains elevated due in part to supply disruptions that have pushed up energy prices and costs in other sectors.

Fed Launches Reform Initiative as Warsh Proposes Five Working Groups

In his first press conference in Washington as Fed Chair, Kevin Warsh announced the launch of a broad reform initiative, including the establishment of five special working groups.

According to Warsh, the groups will focus on:

Federal Reserve communication practices;The Fed's balance sheet;The use of and reliance on existing data sources;Productivity and employment issues in a period of structural transition;The Federal Reserve's inflation framework.

Warsh said these issues carry significant practical implications and deserve a comprehensive reassessment. He hopes that most, if not all, of the working groups will complete their work by the end of the year. The teams are currently being assembled and are expected to begin operations in the coming weeks, with preliminary analytical frameworks likely to be presented in the autumn.

Warsh also argued that publishing the dot plot does not help with policy implementation and emphasized that the Federal Open Market Committee does not consider itself bound by interest-rate projections.

He noted that inflation remains well above the Fed's 2% target and stressed that the central bank has no reason to reconsider that target until it is achieved. Therefore, the inflation working group will not be tasked with reviewing the 2% objective. He added that recent history should not dictate future inflation policy and reiterated that forward guidance is no longer suitable under current conditions, saying the Fed has effectively abandoned that approach.

U.S. Retail Sales Beat Expectations in May

U.S. retail sales rose more than expected in May, although the pace of growth may slow as the support from large tax refunds gradually fades amid rising prices.

Data released by the U.S. Census Bureau on Wednesday showed that retail sales increased 0.9% month-on-month in May, exceeding the market expectation of 0.5%.

Part of the increase reflected higher gasoline prices, which boosted sales at service stations. Oil prices had surged during the Iran conflict, pushing gasoline prices to their highest level in four years before retreating. This week, the national average retail gasoline price fell below $4 per gallon for the first time since April.

Consumer spending was supported by tax refunds and gains in equity markets, though part of the increase came at the expense of savings. The savings rate in April dropped to its lowest level in four years.

Core retail sales, which exclude automobiles, gasoline, building materials and food services, rose 0.7% in May following a 0.5% increase in April. This measure closely tracks the consumer spending component of GDP.

Economists at PNC Financial said their internal data showed households are spending tax refunds faster than in previous years, with higher gasoline expenditures accounting for much of the difference.

U.S. Crude Oil Inventories Fall by 8.26 Million Barrels

According to the Energy Information Administration (EIA), U.S. crude oil inventories declined by 8.263 million barrels last week, compared with market expectations for a draw of 4.566 million barrels.

Gasoline inventories fell by 906,000 barrels, slightly below expectations for a decline of 1.001 million barrels, while distillate inventories increased by 951,000 barrels against expectations for a decrease of 470,000 barrels.

Daily crude oil imports declined by 241,000 barrels, while refinery utilization rates rose by 1.4 percentage points.

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