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Key Takeaways

• The Federal Reserve updated its projections for future rate cuts on Wednesday, indicating that borrowing costs could be higher than expected in 2025.

• The Fed’s “dot plot” showed that the median forecast for rate cuts in 2025 was now a half-percentage point, lower than their September projections.

• While interest rates may remain elevated, officials don’t see the same effect in the labor market, where most officials see the unemployment rate remaining steady over the next few years.
  

While the Federal Reserve’s decision this week to cut its key interest rate was widely expected, a series of dots the Fed released Wednesday surprised economists and investors.

The closely followed “dot plot” showed that Fed officials expected to cut their influential federal funds rate by only half a percentage point in 2025. That's half of what central bankers projected when they last released forecasts in September and a quarter-point less than what many economists and traders expected.

Markets fell significantly on the uncertainty laid out for the policy path ahead, with the S&P 500 falling more than 3% into negative territory after the predictions were released.

What the Dot Plot Tells Investors

The dot plot is a part of the economic projections released four times a year during every other FOMC meeting.

The dots give an anonymous snapshot of where the 19 committee members project the fed funds rates will be in the future. A median result of these dots will give investors an overall projection of the federal fund rate’s path, though some have questioned whether it's effective.

The Fed’s economic projections are made on current conditions and will change along with the economy. For example, after Fed officials in June projected just one quarter-point rate cut, the FOMC in September raised their forecast to a full-percentage-point cut for the year as inflation fell further and the labor market showed signs of weakening. The Fed ultimately followed through with those projections.

The Fed Funds Rate For 2025

What it says:  The dot plot for 2025 shows that a majority of the FOMC believe the central bank will cut the federal funds rate by 50 basis points, or a half-percentage point. However, while 10 members held that view, the other nine were spread out over a broad range.

What it means: Investors had already been lowering their rate cut expectations, but the Fed’s projections showed that the central bank was ready to hold interest rates higher for longer while it continued to try to bring inflation down to the target of 2%. Economists said the wide range of opinions between members showed that it could be hard for market watchers to gauge monetary policy's trajectory, especially with uncertainty around economic changes under President-elect Donald Trump.

The Fed Funds Rate For 2026 and Beyond

What it says: After 2025, the interest rate picture becomes more murky. Most members see further reduction going into 2026, but beyond that, central bankers seem to think they'll need to hold interest rates steady.

What it means: Not a lot, according to officials. As Fed Chair Jerome Powell said in a press conference to reporters after the projections were dropped, it's difficult to make any kind of accurate reading beyond the near future.

"When you're projecting the economy, three years out, two years out, you're talking about high uncertainty," Powell said. "It's not possible to confidently predict where the economy is going to be in three years."

Unemployment Rate

What it says: Most Fed officials see the unemployment rate remaining steady at 4.2%-4.3% in 2025, near the current rate of 4.2%. Meanwhile, a handful see it ticking up to 4.4%-4.5% next year.

After that, opinions diverge, with projections for the 2026 unemployment rate ranging from as low as 3.8% to as high as 4.7%, but the largest share of officials saw little movement in unemployment.

What it means: Most officials don’t see a big jump in unemployment, which is good for the economy. However, a strong jobs market could prevent the Federal Reserve from further reducing interest rates.

“The Fed projects continued low unemployment, steady economic growth, and persistent inflation in the year ahead – all of which may make future cuts unnecessary or even counter-productive," said Cory Stahle, an economist at Indeed Hiring Lab.

Read the original article on Investopedia