Fed Holds Steady, Dot Plot Signals 2025 Cuts Still in Play

The Federal Reserve left its benchmark interest rate unchanged at its June 18 policy meeting, as expected, but market attention quickly pivoted to the updated Summary of Economic Projections (SEP) and dot plot, which revealed a delicate balancing act. While the central bank held firm on its March projection of two rate cuts in 2025, it did so with a slimmer margin, signaling that the case for easing remains—but only barely.Of the 19 Fed officials who participated in the meeting, 10 penciled in at least two rate cuts for 2025, while two projected just one cut. Notably, seven officials—up from four in March—now expect no rate cuts at all this year. That drift higher in the dot plot underscores growing division inside the FOMC, and the message to markets is clear: future easing is far from assured. The Fed’s median projection for the federal funds rate in 2025 remained at 3.9%, holding steady from March, while projections for 2026 and 2027 were left unchanged at 3.4% and 3.1%, respectively.While the dot plot captured most of the market's attention, the SEP forecasts provided important context. The Fed now expects slower growth and stickier inflation over the next two years, reflecting a more stagflationary outlook. For 2025, GDP growth was revised down to 1.4% from 1.7%, while PCE inflation was raised to 3.0% from 2.7%. Core PCE inflation—the Fed's preferred gauge—was also bumped up to 3.1% from 2.8%. Meanwhile, the unemployment rate forecast ticked up to 4.5% from 4.4%.The 2026 outlook followed a similar path, with GDP lowered to 1.6% from 1.8%, and both headline and core inflation estimates nudged up to 2.4% from 2.2%. Importantly, the higher inflation projections were not met with a tighter rate path, suggesting the Fed is willing to tolerate above-target inflation for longer, possibly due to lingering uncertainty around tariffs, supply chains, and fiscal policy. The Fed’s statement, subtle but notable changes were made. The Committee acknowledged that “uncertainty about the economic outlook has diminished but remains elevated,” a clear shift from May’s assessment that “uncertainty… has increased further.” The removal of language warning that "risks of higher unemployment and higher inflation have risen" also struck a more confident tone. Though inflation commentary was left unchanged— "inflation remains somewhat elevated"—the broader risk language implied a slightly less alarmed Fed.On the labor front, the wording was trimmed from "the unemployment rate has stabilized at a low level" to simply "the unemployment rate remains low", reinforcing the notion of ongoing strength in the labor market rather than stabilization. However, the revised unemployment projections hint at softening ahead.Markets initially reacted positively to the Fed holding its 2025 median dot at 3.9%, with the S&P 500 and Nasdaq ticking higher. But that enthusiasm faded as traders digested the narrower majority supporting two cuts and the more stagflationary economic outlook. The September rate-cut probability climbed to about 70%, reflecting hopes for a policy shift later this year, but sentiment remains mixed. As one trader put it, "this is a Rorschach test for bulls and bears alike".The Fed’s forward guidance remained unchanged. It reiterated that it "will carefully assess incoming data, the evolving outlook, and the balance of risks", and that it is prepared to adjust policy as appropriate. No changes were made to the pace of quantitative tightening or to the reaction function framework.The roster of voters also saw the usual rotation, with Neel Kashkari exiting and Jeffrey R. Schmid joining as a voting member—a procedural change with no policy signal.In sum, while the Fed preserved its two-cut outlook for 2025, the path to rate relief is narrower and more contingent on incoming data. The modest reduction in stated uncertainty offers a touch of optimism, but the SEP’s combination of lower growth and hotter inflation risks leaning toward a higher-for-longer narrative. Markets are left parsing a nuanced message: easing is still on the table, but the bar for action remains high. The road ahead is bumpy, and the dot plot reflects just how tight the race is between dovish patience and hawkish caution.