Federal Reserve Cuts Rate 25%, Signals Two More Cuts This Year

On Wednesday, the Federal Reserve, as expected, lowered its benchmark interest rate by 25 basis points, bringing the target range to 4%-4.25%, the lowest level in nearly three years. Additionally, the Federal Open Market Committee (FOMC) provided signals for future policy paths.

The market was particularly interested in the "dot plot," which shows the future expectations of the members. The results indicated that there would be two more rate cuts this year, one in 2026, and one in 2027, bringing the fund rate down to around 3%, which the committee's median forecast considers "neutral."

This announcement left the market confused. The Dow Jones Industrial Average initially showed a slight weakening in its upward momentum but still closed 260 points higher. However, the S&P 500 and Nasdaq indices both closed lower. In the bond market, short-term yields fell, while long-term yields rose, which could be a potential problem for the Fed as it tries to avoid stagflation.

Part of the confusion may stem from the Chairman's characterization of this rate cut as a "risk management" operation. Beyond that, while the FOMC suggested a faster pace of rate cuts this year (with actions expected at the remaining two meetings in October and December), it projected only one rate cut per year for the next two years and none in 2028. This mix of dovish and hawkish stances left the market unsettled.

The meeting began with a strong political undertone as the newly appointed member took part in the meeting for the first time. However, the Chairman showed little sign of tension. "The only way any voter can truly change the situation is to have an incredibly persuasive argument, and in our context, the only way to do that is to base it on data and a deep understanding of the economy. That's what's truly important, and that's how it operates," the Chairman stated.

Despite being the sole voter against the rate cut (advocating for a larger half-percentage point cut), the dot plot revealed significant disagreement among officials, highlighting the challenges ahead for future policy. Those who wanted only one more rate cut this year narrowly lost to those who wanted two, by a margin of 10 to 9. Future year projections also showed a wide range of potential outcomes.

Economists and analysts weighed in on the decision. One noted that the single dissenting vote, which was less than some had anticipated, might indicate a sense of unity among the members. Another highlighted the potential challenges the Fed will face in balancing full employment and price stability, particularly given the current economic conditions. A third economist cautioned against placing too much faith in the current projections, given the upcoming changes in the Fed's personnel and the potential for higher inflation tolerance.