The Federal Reserve on Wednesday cut interest rates for the first time in 2025 and released policymakers’ quarterly forecast of economic conditions that shows the potential outlook for further rate cuts, as well as inflation and the labor market.
The 25-basis-point cut lowered the benchmark federal funds rate to a new range of 4% to 4.25%, after rates were held steady at the first five meetings of this year amid economic uncertainty regarding the labor market and inflation amid tariff shifts and immigration policy changes.
Despite inflation remaining above the Fed’s 2% target and tariffs expected to push inflation higher into next year, the Fed cut rates in response to signs of softness in the labor market in recent jobs reports.
The Federal Open Market Committee (FOMC), which guides the central bank’s monetary policy moves, released its quarterly summary of economic projections – commonly known as the “dot plot” – which anonymously showcases policymakers’ forecasts for a range of indicators.
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The Fed’s dot plot shows two more interest rate cuts this year, with 25-basis-point cuts projected at the central bank’s October and December policy meetings. That would leave the federal funds rate at a median of 3.6% this year, within a range of 2.9% to 4.4%.
The pace of rate cuts is projected to slow in 2026 and 2027, which have median estimates of 3.4% and 3.1%, respectively.
Policymakers forecasted that the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, will rise to 3% this year based on the median forecast within a range between 2.5% and 3.2%. Core PCE, which excludes volatile food and energy prices, is projected to reach 3.1% in 2025 in a range of 2.7% to 3.4%.
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The unemployment rate was also projected to rise this year to 4.5% in the median forecast with policymakers seeing it within a range of 4.2% to 4.6%. Next year, the unemployment rate is projected to be 4.4% in a range of 4% to 4.6%.
Economic growth is projected to come in at 1.6% real gross domestic product (GDP) in 2025, within a range of 1.3% to 2%. Policymakers see growth rising to 1.8% next year in a range of 1.5% to 2.6% in 2026, before increasing further to a median estimate of 1.9% based on a range of 1.7% to 2.7% in 2027.
Bill Adams, chief economist for Comerica Bank, said that the dot plot “shows that 10 FOMC members favor lowering rates by at least another half percent by the end of 2025, while nine members favor a quarter percentage point or less of additional cuts.”
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“The split of dots on the dot plot is something to behold. One member thinks the Fed should raise rates a quarter percent before year-end, and six members think the Fed should hold them steady,” Adams said. “Two members see one additional quarter percentage point as more appropriate, and nine see a half percent more of cuts (quarter percentage point cuts at each of the next two decisions.)”
“One FOMC member thinks the Fed should cut rates by another 1.25% by the end of the year to a range of 2.75%-3%; this is presumably the newest FOMC member, Stephen Miran. That’s a remarkably wide range of opinion about decisions that are not far in the future,” Adams explained.
Michael Pearce, deputy chief U.S. economist at Oxford Economics, noted that Miran “is the clear outlier in the economic projections,” which pushed down the median rate projection for this year and “hides the deep split on the FOMC” over the near-term rate cut outlook.
Seema Shah, chief global strategist at Principal Asset Management, said that the “dot plot showing two more cuts this year reinforces the notion that today is the first in a sequence of cuts and should give markets a positive boost.”
“Next year’s dot plot is a mosaic of different perspectives and is an accurate reflection of a confusing economic outlook, muddied by labor supply shifts, data measurement concerns, and government policy upheaval and uncertainty,” Shah added. “Overall, though, today’s measured 25-basis-point cut allows the Fed to get ahead of a slowdown without overreacting to early signs of strain.”
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