The dot plot indicates that the FOMC anticipates two cuts in 2025.
To the surprise of very few, the Federal Open Market Committee (FOMC) kept the federal funds rate where it has been since December – at the 4.25% to 4.50% range.
The FOMC also projects to have two rate cuts in the second half of the year, according to the FOMC’s quarterly summary of projections. This is also unchanged from last quarter.
“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated,” the FOMC said in a statement Wednesday.
The committee added that “uncertainty about the economic outlook has diminished but remains elevated.”
After declining for three consecutive months, the Consumer Price Index ticked higher in May to 2.4%. Also, Retail Sales dropped 0.9% in May, which was worse than expected.
“In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook,” the FOMC statement said. The committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the committee’s goals. The committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
In his press conference, Fed Chair Jerome Powell cited the continued risks of inflation from tariffs.
“We’ve had goods inflation just moving up a bit, and we do expect to see more of that over the course of the summer,” Powell said. “It takes some time for tariffs to work their way through the chain of distribution to the end consumer … So, we’re beginning to see some effects and we expect to see more of them over the coming months.”
Dot plot shows two rate cuts in second half of 2025
The Fed standing still was widely anticipated by interest rate traders. The CME FedWatch poll said that 99.9% of traders expected no move in May. Further, only 15% anticipate a cut in July.
The majority sees the first rate cut of the year coming in September, with 59% anticipating a 25-point reduction and 9% expecting a 50-point cut. Further, most, about 70%, expect the rate to be at 3.75% to 4% by December.
This aligns with the FOMC’s quarterly summary of projections (SOP), or dot plot. The dot plot is an accounting of where the members of the FOMC expect rates, and other economic indicators, to be down the road. While the projections are not set in stone, they do provide investors with a glimpse of where the FOMC sees things headed.
The June SOP anticipates rates to be at 3.9% in December, at least that is what the majority of members think. That would mean that two rate cuts would be coming by then. This is also what the FOMC projections said in March.
The FOMC also anticipates two more cuts in 2026 down to 3.4%, and one more in 2027 to 3.1%. Of course, these estimates are subject to change as conditions change.
Stocks were mostly flat after the FOMC meeting, as it was widely expected and investors were probably happy that the projections didn’t change.
