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

The Federal Reserve’s dot plot showed that officials still see two more rate cuts coming in 2025 despite a more pessimistic outlook for the economy.

Economic projections released alongside the Fed’s interest rate decision Wednesday show that the central bank is still projecting two rate cuts for 2025. However, more Fed officials pulled back on their interest rate cut projections and their outlook for unemployment, economic growth and inflation worsened.

“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 after every other Fed meeting, approximately once every quarter. 

Economists look at the median result to get an indication of the path ahead for interest rates. Lower interest rates can lead to more business and investing activity. Investors also monitor the Fed’s projections for their predictions about other economic indicators, such as gross domestic product (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:  Most Fed voters see two more cuts coming from the FOMC this year, with nine of the voting members projecting a drop to 3.75% to 4.0%. However, four members didn’t forecast any interest rate cuts this year, while another four projected just one 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. However, unlike in December, when there was a wide variance between the members, this dot plot showed that some members pulled back on their forecasts for rate cuts. Only two members predicted the Fed would go even further with rate cuts this year.

The projections were mostly in line with market expectations. According to the CME Group’s FedWatch tool, investors aren’t pricing in a rate cut until the Fed’s June meeting, with most seeing one more rate cut coming in 2025. Economists have also broadly projected two or three rate cuts from the Fed this year. 

The Fed Funds Rate for 2026 and Beyond

What it says: Further out, most Fed officials see another two rate cuts coming in 2026 to bring the rate down to 3.25% to 3.5%. Going into 2027, most Fed officials forecast at least one more rate cut, with a handful seeing the federal funds rate drop below the 3% level.

What it means: Interest rates should get near the long-term projection of around 3%, but there’s not a lot of certainty around that position. More than a third of members see interest rates remaining above 3% long-term, while fewer see it dropping as low as 2.5%. The projections show that Fed officials aren’t as confident that interest rates will move lower than when they last charted the path.

The Unemployment Rate

What it says: Federal Reserve officials see unemployment worsening in 2025, with most seeing it rise to between 4.4% and 4.5%. The unemployment rate was at 4.1% in February. In their December forecast, most central bankers predicted a more modest rise in unemployment.

What it means: A higher unemployment rate would likely help spur the Federal Reserve to cut interest rates, but it also could be an indicator that economy is tipping into a downturn..