As expected, the Fed announced last week another 25 basis point interest rate cut (the third consecutive cut this year), leaving the deposit facility rate in the 4.25–4.5% range. This decision, which Powell noted was a more difficult choice for FOMC participants than previous ones, with one dissenting vote (Cleveland Fed President Beth Hammack), was described as a recalibration of monetary policy, now more closely aligned with current economic conditions.
Despite the rate cut, the overall tone of the meeting was hawkish. At the post-meeting press conference, Powell repeatedly emphasized that the central bank will act more cautiously going forward and that it will “move” more slowly, signaling fewer rate cuts than originally anticipated.
The latest set of quarterly economic projections confirmed that a soft-landing scenario remains the baseline. GDP growth for this year was revised upward by 50 basis points, from 2% to 2.5%, and by 10 basis points to 2.1% next year, remaining at 2% in 2027. The Committee also lowered its unemployment rate expectations for this year and the next, once again demonstrating that the U.S. labor market is resilient and is expected to remain so in the coming years.
Although inflation is still expected to reach the Fed’s 2% target, the Committee now projects that this will occur in 2027, one year later than the September projections. Both headline and core PCE have been revised upward through 2026. In fact, next year’s PCE projections were revised up by 40 basis points for headline PCE and 30 basis points for core PCE.
Expectations of a stronger economy, with a robust labor market, led FOMC participants to adjust the highly anticipated dot plot. It is also worth noting that Powell acknowledged that some Fed members were already incorporating the “estimated economic effects of policies” into their forecasts, referring to the expected policies of Trump.
The 2025 median dot plot shows only 50 basis points in rate cuts for the coming year, likely two 25-basis-point cuts, which is half of the full percentage point reflected in the September projections. Additionally, only five members see at least 75 basis points in rate cuts, far fewer than the 17 in September. The dot plot shows an additional 50 basis points in cuts for 2025 and 25 basis points for 2026. The median long-term projection was slightly revised from 2.9% to 3%.
Despite the stronger economic outlook, markets reacted to expectations that the Fed would keep rates higher for longer. U.S. equity indices fell, with the S&P 500 and Nasdaq recording their largest intraday declines since the summer. U.S. Treasury yields continued to rise, with 10-year yields reaching their highest level since the end of May, and the 2–10 year curve steepening to its highest level since 2022.
Following the announcement, investors also adjusted their expectations for next year, pricing in less than 50 basis points of rate cuts by the end of the year.
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