The Fed Sees More Cuts Coming

Market watchers tried to decipher the Federal Reserve officials’ expectations for future rate cuts Wednesday, with their latest projections released alongside the decision to cut interest rates for the first time since 2020.

The Fed’s closely followed “dot plot” showed more reductions to the influential fed funds rate, likely at its upcoming meetings and into next year. The latest projections showed that the Fed could cut another half-percentage point from interest rates this year—and another full percentage point in 2025.

That’s a bit less aggressive than the expectations of futures traders, per the CME FedWatch tool, which suggests that investors expect 75 basis cuts this year.

The Dot Plot Lays Out a Path for Interest Rates

The Fed’s economic projections, including the dot plot, are released four times a year at every other Federal Open Market Committee (FOMC) meeting. Through a series of dots, the graph shows where each of the 19 committee members believes interest rates will be at future dates. However, the data is anonymized.

Investors typically view the median result in the dot plot as the Fed’s overall projection for interest rates, though the opinions of individual members can diverge. Not all market watchers pay attention to the dot plot, with some saying it paints an unclear picture of the future. 

The last dot plot, released in June, showed Fed officials believed there would only be one 25 basis point interest rate reduction this year, though several believed the central bank would cut twice more.

Since then, the labor market has shown signs of softening, and inflation has continued to trend lower. Because of that, investors have been pricing in even bigger rate cuts in anticipation of Federal Reserve action. 

The Fed Funds Rate For The Rest of 2024

What it says: Nine members see at least 50 basis points of cuts through the end of the year, while another seven see just one more cut of 25 basis points before the end of the year, resulting in a median rate of 4.4%. Two believe the rates should stay at their current level of 4.75% to 5% through the rest of the year, while another member believed steeper cuts were needed by year’s end. 

What it means: If the Fed follows the projections, it could make a quarter-percentage point rate cut at each of its November and December meetings or perhaps a half-percentage point cut at just one meeting. The result would be interest rates of 4.25% to 4.5% going into 2025. 

“It would be odd for the Fed to aggressively cut in September and then take the following meeting off, particularly with interest rates still restrictive,” said Ryan Sweet, chief economist at Oxford Economics, who forecasts 25-basis-point cuts at the next two meetings.

Federal Reserve Chair Jerome Powell said in his press conference that committee members weren’t in a rush to cut interest rates.

“It’s a process of recalibrating our policy stance away from where we had it a year ago—when inflation was high and unemployment low—to a place that’s more appropriate given where we are now, where we expect to be, and that process will take place over time,” Powell said.

The Fed Funds Rate For 2025 and Beyond

What it says: At least eight members believe that interest rates will be between 2.75% and 3.25%, while another nine saw rates upwards of 3.75%. The median rate was a full percentage point below 2024 at 3.4%. Beyond that, Fed officials projected that interest rates would reach a median level of 2.9%.

What it means: Lowering borrowing costs should help fuel further economic growth and continued gains in the stock market, economists said.

“So long as the economy holds up and inflation doesn’t roar back to life, lower rates and strong earnings growth can continue to drive stocks higher over the long term,” said Bret Kenwell, eToro US investment analyst.

The Unemployment Rate

What it says: Members were split on where unemployment would go, with 10 seeing the unemployment rate moving up to between 4.4% to 4.5%, while the other members saw unemployment remaining near its current level of 4.2% this year.

What it means: The projections showed that Fed officials expect unemployment to get a little worse before it gets better. Worries about a slowing job market are one factor that Powell said moved the Fed to make a bigger-than-ordinary cut today.

While today’s cuts may not prevent unemployment from worsening in the short term, central bankers’ projections for 2025 and beyond show they think the job market will likely remain healthy.