Fed Cuts Rates but Sends Mixed Signals: Dovish Dots, Hawkish Words, and a Market Rorschach Test

The Federal Reserve delivered a widely anticipated quarter-point rate cut on Wednesday, but the decision and accompanying materials left investors parsing a mixed signal. The policy statement acknowledged slowing job gains and tilted toward rising risks to employment, but it also noted that inflation “has moved up.” Meanwhile, the updated dot plot and Summary of Economic Projections (SEP) suggested that most officials expect multiple cuts ahead, with the center of gravity shifting meaningfully lower from June. The combination explains the choppy price action across markets, with equities swinging back and forth and the 10-year Treasury yield briefly dipping below 4.00% before rebounding above 4.03%.

The statement itself was less dovish than some investors had hoped. Compared to July, the first sentence was pared back, dropping a reference to swings in net exports but otherwise keeping the same assessment that growth had moderated in the first half of the year. More notable was the change in labor market language: July described conditions as “solid” with unemployment low, while September acknowledged that “job gains have slowed, and the unemployment rate has edged up but remains low.” That shift signals greater Fed sensitivity to the cooling in labor data seen over the past several weeks.

On inflation, the September statement added that “inflation has moved up,” a more hawkish phrase than July’s characterization that inflation “remains somewhat elevated.” That addition seemed designed to reassure skeptics that the Fed is not ignoring the recent firming in prices. At the same time, the Committee added a new line judging that “downside risks to employment have risen,” a dovish counterweight that framed the balance of risks as having shifted enough to justify a cut.

The Fed reduced the target range for the federal funds rate by 25 basis points to 4.00%–4.25%. Officials maintained the standard pledge to carefully assess incoming data and kept the quantitative tightening program unchanged. The vote revealed one dissenter: Stephen I. Miran, who pushed for a 50 basis point cut. By contrast, prior hawkish dissenters Bowman and Waller joined the majority in favor of a quarter-point move. That change underscores the broader shift within the Committee toward easing, even as debate remains over the pace.

Where the dovishness was most evident was in the dot plot. In June, the median expectation for 2025 was around 3.875%, which implied two cuts, with a sizable number still anticipating no cuts at all. By September, the distribution shifted down. Only one participant remained at 4.375%, while six clustered at 4.125% and nine projected 3.625%. One outlier even penciled in 2.875%, a far more aggressive easing path. That distribution signals that the majority of officials now expect at least three cuts by year-end 2025, a marked departure from June.

The 2026 projections also moved lower. In June, most participants were clustered in the 3.625%–3.875% range. By September, the cluster had spread down to 3.125%, with the largest group still at 3.625% but four members now seeing rates closer to 3.125%. That implies a quicker easing trajectory, with the median shifting down. For 2027, the distribution also tilted dovishly, with more participants expecting rates near 3.125%.

The SEP reinforced this dovish shift. The median federal funds rate for 2025 is now 3.6%, down from 3.9% in June, and 2026 is now 3.4% versus 3.6%. The 2027 median remained unchanged at 3.1%. Alongside this, the Fed raised its growth outlook modestly, with GDP projected at 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027 — each slightly higher than June. Unemployment was nudged down by a tenth in 2026 and 2027, reflecting a more optimistic labor market outlook. The inflation outlook, however, was marked higher in 2026, with PCE and core PCE both projected at 2.6% instead of 2.4%. That suggests disinflation will be slower than previously assumed, tempering the dovish tilt.

The net effect is a Fed trying to balance signals. The statement gave ground on the labor market but added hawkish nuance on inflation. The rate cut was as expected, but the dissent highlighted the ongoing debate. The dot plot and SEP, on the other hand, leaned clearly dovish, with most members now in the “three-cuts” camp for 2025. For markets, this was less a clear message than a Rorschach test, open to interpretation depending on what investors were hoping to see.

That ambiguity explains the choppy trading in equities and bonds immediately after the release. Some traders had anticipated a cleaner dovish signal, and the acknowledgment of firming inflation was taken as a check on expectations. Others focused on the dot plots, which underscored that the Commitee is shifting toward easier policy in the quarters ahead. The 10-year yield’s whipsaw around 4.00% captured that tension, while equity markets saw an initial lift fade into hesitation.

Attention now turns to Chair Jerome Powell’s press conference. Markets will be parsing his tone for clarity on whether the Committee is genuinely worried about inflation’s persistence or whether the balance of risks narrative will dominate. Powell’s framing could determine whether investors rotate more aggressively into cyclicals and small-caps, as suggested by the dovish dot plot, or remain cautious if his tone is less accommodating.

Ultimately, the Fed’s September meeting delivered a cut but also highlighted the fine line it is walking. Policymakers are attempting to address slowing employment without undermining credibility on inflation. The dot plot suggests a faster easing path is ahead, but the statement’s language restrained hopes for a quick dovish pivot. That tension leaves markets searching for direction, and the next moves may depend less on the dots themselves than on how Powell interprets the risks in his remarks.