The Fed will cut rates 25bp on Wednesday, and the Summary of Economic Projections will add a third quarter-point rate cut for the end the year (up from the two cuts seen in June’s SEP). We don’t expect a 50bp cut, nor do we expect – despite the dots – the Fed to signal that an October cut is a fait accompli, adding some hawkish undertones to the meeting. As we pointed out in last week’s publication (see here), rate cuts this autumn, starting with this meeting, would have the Fed cutting rates even while inflation is running well over the 2% target. This doesn’t seem to concern the markets, which continue to price in a series of rate cuts well into next year.
Let’s start with the dots. In the June SEP, the median 2025 projection envisioned two rate cuts this year (assuming 25bp for each). It wouldn’t take more than one or two contributors to move their dots lower for this quarter’s SEP to arrive at the three cuts we expect to be signaled. To mitigate against the market keying in on this anticipated change, we expect Chair Powell to point out – as he is wont to do at his press conferences – that the dots don’t represent a plan or a forecast but rather a representation of the collective view of the Committee given the outlook.
We note that these cuts are largely fully priced in the market now, as Exhibit #1 shows. In addition, if the dots are indeed lower for 2025, we would expect that the projections for unemployment will have to rise from June’s 4.5%. Finally, we don’t have a high conviction view on 2026 and would not be surprised if the Committee as a whole feels the same way. In this regard, a wide dispersion of 2026 dots is not unlikely, and we don’t think the market will read too much into next year’s projections.
Turning to the expected rate cut and how it is characterized, we first will look at the statement, which we expect to note the weakening in the labor market. At the July meeting, the statement was changed to assert that economic growth had moderated (from earlier statements asserting that the economy was expanding at a solid pace). How much alarm the Fed expresses about the economy and weakening jobs growth will be interesting, especially given the expected rate cut. However, if it also raises concerns about inflation, which is stubbornly high and potentially still grinding higher in coming months, it would highlight a degree of caution about a locked-in extended cycle. This is something we expect Powell to point out in his press conference, likely softening any overly dovish read of the meeting.