Dot Plot Spotlight: Fed Still Sees Interest Rate Cuts Coming, Despite Uncertainty

Takeaways

• The Federal Reserve dot plot shows that officials still expect to see two additional rate cuts in 2025 and two in 2026. But expectations vary among members.
• The projections showed the Federal Reserve members to be less confident in reducing interest rates than they were before December.
• The projections showed that the unemployment rates are expected to rise beyond current levels.

The Federal Reserve’s dots plot showed that officials still expect two more rate reductions in 2025, despite a more negative outlook for the economy.

The Fed’s interest rate decision on Wednesday was accompanied by a set of economic projections that showed the central bank still projected two rate cuts in 2025. The Fed has backed off its interest rate reduction projections, and their outlook on unemployment, economic growth, and inflation has deteriorated.

“Revisions to FOMC members’ projections had a somewhat ‘stagflationary’ feel with forecasts for growth and inflation moving in opposite directions,” said Whitney Watson, Goldman Sachs Asset Management co-chief investment officer.

Why Investors Follow the ‘Dot Plot’

Investors were paying attention to the “dot plot” to get the latest snapshot of the Federal Open Market Committee (FOMC) ‘s thinking. The dots anonymously track where the 19 FOMC members believe the Fed funds rates will be later this year, next year, and at other points in the future. The graph is released every other Fed meeting or roughly every quarter. 

To predict future interest rates, economists use the median result. Lower interest rates can encourage more business and investment activity. Investors also monitor Fed projections to see what they predict about other economic indicators such as GDP and inflation rates.

Predictions were "admittedly challenging exercise at this time, in light of considerable uncertainty," Fed Chair Jerome Powell said in a press conference with reporters.

The Fed Funds rate for 2025

What it says  The majority of Fed voters expect two more cuts from the FOMC in this year. Nine voting members are predicting a drop between 3.75% and 4.0%. Four members did not predict any interest rate reductions this year while four others projected only a 25 basis point cut. 

What it means: The Fed kept with its December projections, which laid out the possibilities of two 25-basis-point interest rate cuts over the course of 2025. This dot plot, however, showed that unlike December, where there was a large variance between members, some members backed off their forecasts of rate cuts. Only two members predicted the Fed would go even further with rate cuts this year.

The projections were largely in line with expectations. According to CME Group’s FedWatch, investors don’t price in a rate reduction until the Fed’s meeting in June, and most expect one more rate reduction in 2025. Economists have also projected that the Fed will cut rates two to three times this year. 

The Fed Funds Rate in 2026 and Beyond

What it says In the future, most Fed officials predict that two more rate reductions will occur in 2026. This would bring the rate down from 3.25% to around 3.5%. In 2027, the majority of Fed officials expect at least one additional rate cut. A handful see the federal fund rate dropping below the 3% mark.

What it means: The long-term projection for interest rates is around 3%. However, this position is not very certain. More than one-third of members think that interest rates will stay above 3% for the long term, while only a few see them dropping to as low 2.5%. The projections indicate that Fed officials don’t feel as confident about the future of interest rates.

Unemployment Rate

What it says The Federal Reserve officials predict that unemployment will worsen by 2025. In February, unemployment was at 4.1%. In their December forecasts, most central banks predicted a modest rise in unemployment.

What it means: A higher unemployment rate could help the Federal Reserve cut interest rates. However, it could also be an indication that the economy is heading into a recession.