Fed Rate Cut, And Then What?

A quarter-point rate cut is virtually guaranteed when the Federal Reserve delivers its decision next Wednesday at 2:00 p.m. ET, alongside fresh economic projections and the all-important dot plot. Markets have already priced it in as a done deal, leaving the real drama for 2:30 p.m., when Chair Jerome Powell takes the podium. That’s when investors will be watching every word to gauge how the Fed sees the road ahead—whether the updated SEP shows a slow grind lower in rates or a faster pivot as jobs cool and inflation lingers. The suspense isn’t about the cut itself, but about Powell’s tone and the message: is the Fed ready to ease aggressively, or will it stick to a cautious, higher-for-longer path into 2026?

Market backdrop

Fed funds futures are currently pricing in a series of four consecutive 25-basis-point cuts, bringing the policy rate down by 100 bps by early 2026. That dovish trajectory has already provided a tailwind for equities, particularly small-caps, which thrive on easier financial conditions. The market’s expectation sets up a critical communications test for Powell and the Committee: either validate the easing path or push back, risking volatility across asset classes.

The dot plot: where policy is headed

The Fed’s updated Summary of Economic Projections (SEP) will be the focal point. The June projections, compared with March, painted a picture of stickier inflation and slightly weaker growth:

• Growth (real GDP): Downgraded to 1.4% in 2025 (from 1.7%) and 1.6% in 2026 (from 1.8%).
• Unemployment: Higher across the board, now 4.5% in both 2025 and 2026, vs. 4.4% and 4.3% previously
• PCE inflation: Raised to 3.0% in 2025 and 2.4% in 2026, vs. 2.7% and 2.2% in March.
• Core PCE: Hotter at 3.1% in 2025 vs. 2.8% prior, easing gradually back to 2.0% by 2027.
• Policy path: 3.9% in 2025 (unchanged), 3.6% in 2026 (vs. 3.4% prior), and 3.4% in 2027 (vs. 3.1% prior).

Taken together, the June SEP signaled the Fed’s conviction that inflation will take longer to return to 2% and that policy will need to remain somewhat tighter into the out-years.

The dot plot reinforced this story. For 2025, projections cluster between 3.625% and 4.125%, with the median at 3.9%. In 2026, dots shift lower, centered around 3.375%–3.625% with a 3.6% median. The message: the Fed is prepared to cut, but it sees no rush to move quickly back to neutral. The longer-run estimate of 3.0% underscores that policy will remain restrictive through at least 2026.

Powell’s tone: balancing risks

Powell’s Jackson Hole remarks in August hinted at a subtle dovish shift. He emphasized rising downside risks to employment: payroll growth slowed sharply to just 35,000 per month, and the BLS annual revision delivered a massive downward adjustment to prior job gains. The unemployment rate, now at 4.3%, is still historically low, but Powell acknowledged the unusual balance of both labor demand and supply cooling in tandem.

He put it plainly: “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” That framing opens the door for rate cuts not just as insurance, but as an active step to prevent labor market deterioration.

At the same time, Powell highlighted tariff-related inflation pressures but downplayed the risk of a lasting spiral, calling them more likely “a one-time shift in the price level.” That sets up a policy environment where downside employment risks and upside inflation risks must be balanced.

What could change in the statement

The June statement described economic activity as having “moderated,” with labor conditions “solid” and inflation “somewhat elevated.” Next week’s statement could acknowledge a weaker labor market more explicitly, swapping “solid” for softer language, and recognizing that uncertainty on employment now rivals inflation concerns. Expect continued emphasis on vigilance against inflation but with greater weight on downside risks to jobs and growth.

The balance of risks language will be closely parsed. In prior statements, the Fed leaned toward inflation as the dominant concern. Now, the dual mandate may call for equal footing between the two risks. That would align with Powell’s Jackson Hole speech and provide justification for a series of cuts.

Dissent risk: Waller and Miran

While the base case is a 25 bps cut, the possibility of dissent looms. Governors Christopher Waller and Adriana Kugler dissented previously in favor of more aggressive easing, and the arrival of new Fed Governor Adrian Miran could tilt the dynamic further. Waller and Miran are seen as potential advocates for a 50 bps cut this meeting, arguing that waiting risks a sharper employment deterioration.

Such dissents would not alter the outcome—a quarter-point move is still the overwhelming consensus—but they would send a signal that the internal debate is intensifying. Markets would read two 50 bps dissents as laying the groundwork for a potential half-point cut at a future meeting, particularly if jobs data weaken further.

The political backdrop

Complicating the picture is the growing influence of the White House. With President Trump likely to soon hold a majority on the Fed Board, political pressure for faster and larger cuts could intensify. The Fed’s credibility hinges on balancing that backdrop with data-driven policymaking. Powell is expected to reiterate independence, but the optics of dovishness may be harder to manage in a politicized environment.

Investor takeaway

Next week’s Fed meeting is about more than a 25 bps cut. Markets already have that outcome priced in. The key will be how the dot plot, projections, and Powell’s tone align with futures markets that expect 100 bps of easing over the next four meetings.

If Powell validates that trajectory, risk assets—especially small-caps—could continue to benefit. But if the dots and projections emphasize a slower glide path, markets may need to recalibrate, with potential for volatility in rates and equities alike.

The Fed’s challenge is threading the needle: easing enough to guard against labor market risks without fueling another inflationary wave. With dissenters pushing for more aggressive cuts and political dynamics in the background, Powell will need to communicate a path that keeps markets, colleagues, and policymakers aligned.