The Fed Rate Decision: Why the Dot Plot Surprised the Market? Predictions Point to Only 2 Rate Cuts Next Year
The latest "dot plot" released by the Federal Reserve (Fed) on September 20th has a distinct "hawkish" tone. This is because the projections from 19 Fed officials on future interest rates reveal two key points: first, most officials support one more rate hike before the end of this year, and second, the number of expected rate cuts next year has been reduced from the forecasted 4 cuts in June to possibly just 2.
More Hawkish Than Expected - One Rate Hike Expected by Year-End
According to the dot plot, 12 out of the 19 officials predict that by the end of this year, the federal funds rate will reach a range of 5.5% to 5.75%, indicating there is still room for one more rate hike this year. This is consistent with the predictions made in June.
Fed Chair Powell mentioned during a press conference that the decision to maintain the current interest rate does not mean policymakers believe that monetary policy is restrictive enough to control inflation. He stated, "You will see that most participants believe that it's appropriate to raise rates again at both of the remaining meetings this year."
Citadel Securities' Head of Rate Trading, Depes, commented that Powell was "more hawkish than expected," emphasizing that "the key point is that the Fed does not want to declare victory over inflation."
Dot Plot Suggests Room for Only 2 Rate Cuts Next Year, Not 4 as Predicted in June
Looking ahead to next year, the dot plot's median projection indicates that Fed officials expect the year-end interest rate to be between 5% and 5.25%. This is 2 notches higher than the 4.5% to 4.75% projected in June.
Assuming that the Fed will indeed raise rates to a range of 5.5% to 5.75% by the end of this year and subsequently lower them to a range of 5% to 5.25% by the end of next year, this means the Fed could potentially cut rates by 2 notches next year. This is a significant reduction compared to the initial prediction of a 4-notch rate cut made by officials in June. At that time, the projected interest rate for the end of next year was a full 1 percentage point lower than the year-end projection for this year, indicating an expected 4-notch rate cut.
Among the 19 officials, 4 expect the interest rate for 2024 to fall between 5% and 5.25%, 6 predict it will be above 5.25%, and 9 foresee it falling below 5%.
Estimates for Rate Cuts in 2025 Reduced by 2 Notches
Looking ahead to 2025, the forecasted rate cuts by Fed officials have also been reduced, with the median estimate for the benchmark rate at 3.9%. This is higher than the 3.4% predicted in June, indicating a 2-notch reduction in rate cuts for 2026.
Officials have also provided their first-ever estimates for interest rates in 2026, with year-end rates expected to fall between 2.75% and 3%.
The "neutral" interest rate, which keeps the economy from being too hot or too cold, remains unchanged at 2.5% in the median estimate, despite some officials offering higher numbers.
Chair Powell mentioned that the neutral rate may be higher than the current estimate, but policymakers are still uncertain. He stated, "Taking into account the changes in interest rates, it can be said that the economy is stronger than many people expected." However, it is possible that the neutral rate is higher "for various reasons, and we are not sure," he added, "It could also be because the policy restrictions are not strong enough or not long enough."
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