Fed delivers third straight rate cut but dot plot projects just one cut in 2026

Federal Reserve policymakers cut interest rates for the third straight meeting on Wednesday while signaling there may be only one cut next year as rates get closer to a neutral level.

The Fed lowered the benchmark federal funds rate by 25 basis points to a range of 3.5% to 3.75%, and its announcement was accompanied by a summary of economic projections – commonly known as the "dot plot" – that includes policymakers' forecasts for the labor market and inflation, as well as the outlook for interest rate cuts. 

It showed that Fed policymakers' median projection for the federal funds rate is in the range of 3.25% to 3.5% – which would reflect just one rate cut next year. Further, policymakers project just one rate cut in 2027, with the median in the 3% to 3.25% range.

Inflation remains elevated at roughly 3%, which is well above the Fed's 2% target and has delayed policymakers from cutting rates earlier this year as the implementation of tariffs pushed inflation readings higher in recent months. Concerns over a weakening labor market pushed the Fed to cut in the last few months.

FED CUTS INTEREST RATES FOR THIRD STRAIGHT TIME AMID UNCERTAINTY OVER LABOR MARKET, INFLATION

The Fed's latest dot plot shows policymakers are projecting that inflation will gradually subside toward the Fed's 2% target in the next few years. 

They see the personal consumption expenditures (PCE) inflation index declining from 2.9% at the end of 2025 to 2.6% next September and 2.4% at the end of next year. It's then expected to decline to 2.1% in 2027, when it would be roughly in-line with the Fed's target.

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Additionally, the dot plot shows the unemployment rate declining slightly in the next few years. It projects that 2025 will end with a 4.5% unemployment rate, which would decline to 4.4% next year and 4.2% in 2027.

During the post-announcement press conference, Federal Reserve Chair Jerome Powell said that following the latest rate cut, the central bank's policy is closer to neutral.

"The Fed funds rate is now within a broad range of estimates of its neutral value, and we are well-positioned to wait to see how the economy evolves," Powell said.

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He said that the Fed's 75 basis points of cuts at the end of this year put the economy in a place where the labor market can stabilize, and they haven't seen evidence of a potential sharper downturn.

Powell emphasized that the Fed is "committed to 2% inflation, and we will deliver 2%," even as they deal with challenges to the labor market and the impact of tariff price hikes on inflation.

He said that the Fed has made progress on non-tariff inflation this year and that as tariffs flow through the economy and impact inflation data next year that the Fed is "well-placed to wait and see how that turns out."

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The Fed chair also reiterated an oft-repeated point that the central bank's monetary policy isn't on a pre-set course, as policymakers will continue to monitor incoming economic data and be prepared to adjust accordingly.