Fed Cuts Rates 25%, Signals Three More Cuts This Year

The Federal Reserve, as widely anticipated, lowered its benchmark interest rate from 4.25% to 4% on Wednesday, marking the beginning of a rate-cutting cycle during the Trump administration. While the market had largely predicted this move, the Fed's latest economic outlook brought some surprises.

Investors are closely monitoring whether there will be two to three more rate cuts this year and the economic signals for 2026. The unexpected element lies in the Fed's assessment of the current U.S. economic situation. The Fed hinted at potential economic weakness ahead, suggesting that further rate cuts may be considered.

The Fed's decision to cut rates by 25 basis points and predict two more cuts this year indicates a shift in focus from tariff-induced inflation risks to a weakening labor market. This move is seen as a risk management strategy, with the Fed attempting to transition from a restrictive policy stance to a neutral one due to increasing risks in the labor market. The Fed's concerns about inflation in a slowing market background are relatively low.

The surprise of the day was not the rate cut itself, but the Fed's dot plot showing a median of three rate cuts by the end of the year, rather than the market's expectation of 2.5 cuts. This slight dovish shift suggests a substantial change in the policy thinking of the Fed's committee members.

The Fed raised its forecast for U.S. economic growth by the end of the year while keeping inflation and unemployment rate projections unchanged. The Fed Chair emphasized that the institution is facing a tense situation, describing it as a normal circumstance. Typically, when the labor market is weak, inflation is low; when the labor market is strong, inflation risks increase. Currently, the Fed is navigating a dual-risk scenario with no risk-free path.

The Fed's projections indicate growing internal divisions within the committee. Some analysts predict that the hawks will eventually be convinced by the data to support further rate cuts. Regarding the market, the current Fed information is seen as favorable for tech stocks and growth stocks, as rate cuts typically lead to stock market rallies. However, the current policy framework is more beneficial for bonds, bearish for the dollar, and has a short-term neutral impact on the stock market.