FOMC Breakdown: 2 More Rate Cuts by End of Year?

The Federal Reserve's recent rate cut was expected, but changes in the 'dot plot' projections indicate a dovish pivot, suggesting at least one or two more rate cuts by the end of the year, which is bullish for markets.

• Fed's dot plot shifted lower, forecasting more rate cuts by year-end.

• At least one, likely two, additional rate cuts are anticipated in October and December.

• Weakening job market data is a key factor driving the Fed's dovish policy.

The Federal Open Market Committee (FOMC) cut rates by 25 basis points as anticipated, which itself had little market impact. However, significant changes in the Fed governors' 'dot plot' projections for the federal funds rate by year-end reveal a shift towards lower rates than previously expected. This forward-looking data indicates a high probability of at least one, and likely two, additional rate cuts in the upcoming October and December FOMC meetings, signaling a new rate-cutting cycle and a bullish outlook for markets.

FOMC Rate Cut Context

• 00:00:05 The recent 25 basis point rate cut by the Federal Reserve was widely expected by the market, with a 98% probability priced in, and therefore did not immediately trigger significant market movements. The true importance of this FOMC meeting lies not in the immediate cut, but in the updated economic projections from the Fed governors, which signal a more dovish stance than previously understood.

Dot Plot Projections Shift

• 00:03:06 The 'dot plots,' which are quarterly projections by Federal Reserve governors for the target federal funds rate, showed a significant shift. The median projection for the end of 2025 dropped from 3.9% in June to 3.6% in September. This downward revision by a majority of FOMC members indicates a collective expectation for lower interest rates in the near future, specifically suggesting more cuts by the end of the current year.

Future Rate Cuts Expected

• 00:08:04 Based on the revised dot plots and current market probabilities, it is almost certain that at least one more rate cut will occur by the end of the year, with a high likelihood of two cuts in the upcoming October and December meetings. The market, as reflected in the CME FedWatch tool, now prices an 86% chance of a cut in October and an 82% chance of another cut by December, reinforcing the dovish pivot and bullish outlook.

Job Market Weakness

• 00:13:52 A primary driver for the Fed's dovish stance is the weakening job market. Recent data revealed significant downward revisions in job numbers, including a reduction of 911,000 jobs in the annual revision data for April 2024 to March 2025. Jerome Powell's statements reflected this concern, highlighting high inflation but also notably weak job figures, indicating a shift in the balance of risks towards higher unemployment.

Quantitative Tightening Continues

• 00:21:20 Despite the rate cuts, the Federal Reserve's balance sheet reduction (quantitative tightening) continues, though at its slowest possible pace, capped at $5 billion per month. Jerome Powell explained that the runoff is minimal and not a significant contributing factor to the economy's current state. The Fed can also prioritize selling mortgage-backed securities over treasury-backed securities to manage liquidity.