The Federal Reserve finished up their latest policy meeting today with a widely expected quarter point rate cut. That takes the headline rate to around 4 to 4.25%. This cut was likely spurred by the slowly declining economic data that we have seen, primarily in the job market. Since this wasn’t much of a surprise, the markets didn’t have a strong reaction.
The big question for the stock market is where will rates go next? The tool that market participants are eager to see and analyze is the Fed’s Dot Plot. This is an anonymous poll of the voting members on where they see rates being in various time frames. Each member gets a dot to place and when you put them all together, you get a sense of what the Fed is currently thinking for the future. These estimates are of course not binding and they change each time it is released. In June, if you take the rough average, you would get roughly 3.75-4% for the end of 2025, about 3.5% for 2026, and about 3.25% for the end of 2027. The latest plot now shows 3.5-3.75% for the end of 2025, about 3.5% for 2026, and about 3.25% for the end of 2027. Again, this isn’t a big change, but it does signal that the expected rate cuts might come sooner than previously thought.
There are two areas for concern when looking at the current dot plot. The first is that people are still expecting interest rates to decrease by about 1% total in the next couple of years. This is potentially concerning because the economic data has repeatedly been stronger than expected and the rate cuts that we have been hoping for over the last three years have been much slower than anticipated. If at some point the economy flattens out and doesn’t continue to slow, then it won’t support further rate cuts. This could be quite a disappointment to the market. So far, the dot plot does not support this, but it is an area of concern that we will be watching over the coming months.
The second area for concern is the increasing
dissension in the ranks of the Fed. Historically, they have voted in a
consensus manner and before the July meeting, they didn’t have two members vote
against the consensus since 1993, with most votes being unanimous. At
this meeting, they had only one vote dissenting, but that was a member that was
only appointed a few days before the meeting. In looking at the latest
dot plot for 2025, most dots are around 3.75%, but there is one at 2.75%.
This is highly unusual, as normally the dots are clumped together. A
difference that large, particularly when forecasting a timeframe spanning only
a few months is very irregular. Again, this is currently not a big
concern, but it could become one over the next few years.