I expect big drama and suspense from the Federal Reserve on Wednesday, September 17.
Oh, not from the Fed’s decision on interest rates. The Fed Funds Futures market is pricing in a 96% chance that the Fed’s Open Market Committee will cut the benchmark interest rate by 25 baSis points to a range of 4.00% to 4.25%, according to the CME FedWatch tool. That seems about right to me.
No, the drama and the suspense will come from inside the Fed. Will chair Jerome Powell be able to hold a consensus around just a 25 basis point cut? Will the Fed’s quarterly revision of its Dot Plot economic projections show that the Fed is contemplating aggressive future interest rate cuts or that the central bank is worried that inflation is about to spike? Those opinions will have a huge effect on Treasury yields, especially at the long end 10-year notes.
At the last Fed meeting in July the decision to hold rates steady drew an extraordinarily large dissent. Two Fed governors voted to cut now, saying they felt the danger of the economy slowing further outweighed the potential for higher inflation. That was an huge expression of conflict for an institution that strives for consensus.
This meeting, with Congress speeding the appointment of a Trump vote to the Fed, it’s quite possible that cutting rates by more than 25 basis points–by 50 say–will get 3 votes. That could be enough to spook overseas investors who are already worried about the potential loss of independence at the Fed and the Trump Administration’s willingness to back big increases to the Federal deficit.
Looking beyond this meeting to the Fed meetings in October and December, the Fed Funds Futures market is inclined to bet on two more 25 basis point cuts in 2025. But the conviction isn’t overwhelming with the odds only at around 70% to 75% in favor of cuts at the next two meetings. (The Fed doesn’t meet in November.)
The language in the Fed announcement of a September cut and the projections in the Dot Plot will go a long way to solidify market belief in two additional cuts in 2025 or to convince skeptics that the rate debate is still raging.
In June, at the last Dot Plot revision, fed officials saw the Fed Funds rate falling to 3.6% in 2026. Importantly, however, that projected rate was higher than the 3.4% projected in its March revision. And the Fed saw core PCE inflation falling to 2.2% by the end of 2026. That would be a significant drop in core inflation from now. But the June projection showed a slowing of progress on reaching the Fed’s 2% target with core inflation in 2026 at 2.4%.
If the trend in the June Dot Plot shows up again in the September revision, it would likely disappoint investors and traders looking for aggressive cuts to interest rates in 2026.
