Fed Meeting Preview: All Eyes on the Dots as Market Braces for Rate Path Update

When the Federal Reserve wraps its two-day policy meeting at 2:00 p.m. ET, no change in the federal funds rate is expected. That part of the story is already priced in. The real drama lies in the updated Summary of Economic Projections (SEP) and the Fed’s closely watched dot plot, which will offer the clearest signal yet on whether officials still expect two cuts in 2025—or if that forecast narrows to just one.

The stakes are high. In the March SEP, the median projection for the federal funds rate in 2025 was 3.9%, implying two 25-basis-point cuts from the current range of 5.25–5.50%. But with inflation proving sticky, geopolitical risk on the rise, and tariff policy muddying the outlook, there’s concern that today’s update may reveal a hawkish drift. Specifically, if the 2025 median dot rises to 4.1%, markets will interpret that as the Fed signaling just one cut in 2025—far less than what’s been assumed in recent months.

The Dot Plot: Hanging by a Thread

The dot plot will be scrutinized with a level of intensity usually reserved for earnings calls in a crisis. In March, nine FOMC participants marked their 2025 policy rate in the 3.75%–4.00% range. If just two of those move a notch higher into the 4.00%–4.25% bucket, the median projection shifts up, effectively reducing the implied number of cuts to one. That change would reinforce the “higher for longer” narrative and send ripple effects through bond yields, equities, and currency markets.

Markets are already bracing. As of this morning, Fed fund futures are pricing in just over one rate cut this year, with a potential first move in September. A dot plot median at or above 4.0% would validate that view and could pressure risk assets, particularly if paired with more hawkish inflation or GDP forecasts.

Watch these dots:

Economic Projections: Stagflation Risk in Focus

Beyond the dots, the economic forecasts embedded in the SEP will also provide critical context. In March, the Fed projected:

• 2025 GDP growth at 1.7% (down from 2.1% in December)
• Unemployment at 4.4%
• Headline PCE inflation at 2.7%
• Core PCE at 2.8%

If today’s update includes a GDP forecast of 1.5% or lower, paired with inflation projections near or above 3.0%, investors may start throwing around the “S-word”: stagflation. That would be an ominous signal that the Fed sees persistent inflation risks even as growth slows—a toxic mix for markets hoping for rate relief.

Watch these lines:

Of particular concern is the inflation side. Core PCE inflation has been trending lower on a short-term basis, but Fed officials remain wary of declaring victory. April’s reading was 2.8% year over year, and anything close to 3% in the updated forecast would suggest that inflation is running hotter than comfort allows.

Tariffs, Trump, and the Shadow Fed

Adding to the complexity is the geopolitical and political backdrop. Tensions in the Middle East are straining global energy markets, while President Trump’s escalating tariff agenda has already begun reshaping inflation expectations. Layer in political pressure—Trump has resumed attacks on Powell and floated the idea of replacing him—and the Fed finds itself navigating not just economics but institutional credibility.

There’s also the fiscal picture to consider. With federal interest payments surpassing Medicare and defense spending, calls to cut rates for fiscal reasons—not economic ones—are gaining traction. The Fed’s independence, already under siege, may quietly factor into how it presents its policy stance today.

Powell’s Press Conference: The Art of Balancing

Chair Jerome Powell will take the stage at 2:30 p.m. ET for what could be one of his more delicate balancing acts. He’s likely to reiterate the Fed’s dual mandate—maximizing employment and keeping inflation anchored—while cautioning that recent progress on inflation is promising but not yet sufficient. He’ll probably acknowledge the softening in economic data, including rising jobless claims and declining retail sales, but he won’t signal cuts are imminent.

Look for Powell to emphasize that the Fed remains data-dependent. If tariffs raise inflation again or the Middle East conflict intensifies, the Fed won’t hesitate to stay higher for longer. But if labor market deterioration continues and inflation cools further, the door to easing remains open.

Market Implications: The Dot Plot Drives the Narrative

The most direct market readout will come from the dots. A shift from 3.9% to 4.1% for 2025 would likely push 10-year yields higher and flatten the curve as investors price in a tighter-for-longer stance. The dollar could rally, particularly if Powell’s tone is firm. Equities may wobble, especially high-multiple growth names that depend on lower discount rates.

On the other hand, if the dots hold at 3.9% and the SEP shows a modest improvement in the inflation trajectory, risk assets could rally, viewing the Fed as slowly preparing for easing without rushing to accommodate political pressure.

Bottom Line

The Fed won’t move rates today, but its updated SEP and dot plot could move markets sharply. A median 2025 dot above 4% would be a hawkish signal, suggesting the Fed may deliver just one cut this year. With inflation still sticky and growth softening, the central bank is walking a narrowing path. Powell’s job is to guide the market without triggering panic or complacency—and today, every dot will matter.

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