Fed's dot plot signals 50 basis points of additional rate cuts in 2025; GDP revised up
The Federal Open Market Committee’s (FOMC) latest dot plot indicates that interest rates will average 3.6% by the end of 2025, below the June projection of 3.9%.
If this forecast comes true, the Federal Reserve (Fed) could implement two additional 25 basis point (bps) rate cuts or a single 50 bps cut in 2025, after trimming the interest rate by 25 bps on Wednesday.
In 2026, rates are projected to drop to 3.4% from the previous 3.6% and to 3.1% in 2027, below the 3.4% projected in the June dot plot. The longer-term forecast remains at 3%.
The Fed also revised its economic projections. US Gross Domestic Product (GDP) is now projected at 1.6% this year, up from the previous forecast of 1.4%. For 2026, the economy is expected to grow by 1.8%, above the 1.6% estimated in June.
The unemployment rate is expected to keep at 4.5% by the end of 2025, matching the previously estimated figure. For 2026, unemployment is likely to fall to 4.4%, below the June projection of 4.5%.
Finally, the Personal Consumption Expenditures (PCE) Price Index is estimated to rise 3% by the end of the year, matching the last forecast. In 2026, PCE inflation is expected to ease to 2.6%, slightly higher than the 2.4% projected in June. By 2027, the PCE index is expected to reach 2.1%.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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