The Federal Reserve lowered its benchmark interest rate by 0.25 percentage points to a range of 4.00% to 4.25% last night, marking its first rate cut since December 2024 and signaling the potential for two more reductions before the end of the year.

The FOMC statement explicitly acknowledged that “inflation has moved up and remains somewhat elevated,” a clear indication that the fight against rising prices is far from over. This language stood in stark contrast to a softening labor market, where the committee noted that “job gains have slowed, and the unemployment rate has edged up but remains low.”

Markets reacted sharply to the press conference:

• 📈 Dollar strengthened, reflecting the Fed’s caution and commitment to keep inflation under control.
• 📉 Equities (S&P 500, Nasdaq) sold off, signaling disappointment among investors hoping for a clear-cut easing cycle.
• 🥇 Gold slipped, tracking the firmer dollar.

Dot Plot

The "dot plot," officially known as the Summary of Economic Projections (SEP), shows where each member of the FOMC expects the federal funds rate to be at the end of the current year and in the years ahead. It offers a glimpse into the Fed’s collective thinking, and the latest plot revealed some key insights:

• 🔹 A Divided Committee: The most notable takeaway was the wide range of views among committee members. There was no overwhelming consensus on the future path of interest rates, highlighting the difficulty of the Fed's current situation. One official projected a much more aggressive pace of cuts than the majority.
• 🔹 The Median Expectation: Despite the dispersion of opinions, the median projection suggested that most officials expect at least two additional rate cuts by year-end. This is often the focus for markets as a baseline for future policy.
• 🔹 No Clear Path: The dot plot isn’t a promise. Fed Chair Jerome Powell emphasized it should be seen as probabilities, not certainties. Projections are based on current information and can change as new economic data arrives, underscoring the Fed’s “data-dependent” approach.
• 🔹 A Lone Dissenter: The split within the Fed was evident with Stephen Miran voting for a more aggressive half-point cut, a rare sign of internal disagreement over handling a softening labor market alongside elevated inflation.

What does this mean:

• ✅ The Fed eased policy slightly but retained a cautious, inflation-focused stance.
• ✅ Markets should expect gradual, data-driven adjustments rather than a rapid rate-cut cycle.
• ✅ Short-term volatility in equities, FX, and commodities is likely as traders digest the Fed’s message on dual mandate.

The Fed's next moves are not on a preset path. Their mantra remains “data-dependent”, meaning every inflation report, jobs number, and economic release will be scrutinized for clues on what comes next.