The Fed tops a heavyweight line-up of central bank meetings this week. The FOMC is fully priced to cut rates 25bps to 4.00–4.25% as it restarts its easing cycle. Some Wall Street banks are speculating that we could see a bigger 50bps move, but traders currently give that around a 4% chance.  Markets will be screening the updated quarterly Summary of Economic Projections including the dot plots, as well as Fed Chair Powell’s press conference to figure out how far the cycle might reach and the pace of future rate cuts. The outcome of this meeting will likely set the tone of the rest of the year as the dollar closes in on long-term lows, while stocks have recently hit countless record highs.
Since Powell’s dovish pivot at Jackson Hole, markets have increased their bets on the Fed recommencing their rate cutting cycle at this Wednesday’s meeting. The battle between the two planks of the central bank’s mandate appears to have been won by the employment side. A softening labour market with job growth stalled and big recent downward revisions now outweighs any tariff-induced inflation risks. The latter are seen as a one-off price shift which are not deemed to be persistent.
There could me more potential surprises in store at this meeting, as some officials may again dissent and push for a bigger rate reduction. If confirmed as a new member of the FOMC, Stephen Miran, plus Bowman and Waller could support a 50bps cut. There are also remaining legal challenges over whether Lisa Cook will be able to vote in this meeting, though it seems likely she will be able to.
SEPs in focus
The Summary of Economic Projections (SEPs), which include the dot plot will be a big focus for markets. The Fed’s dot plot is a chart published quarterly that shows where each member of the Fed’s policymaking committee expected interest rates to be over the next few years. Most economists expect forecasts to be trimmed for growth and inflation (PCE), while the unemployment rate projections are lifted.
Dot plot expectations are key, with a wide range of views by Fed officials expected. Risks are likely weighed towards more rate cuts priced in, with the risk of 75bps in 2025, versus 50bps in the most recent estimate from June, while the 2026 median is pushed down by as much as 50bps.
Market reaction
Current market pricing sees around 68bps of rate cuts priced for 2025. That is essentially back-to-back moves in September and October, with roughly above a 70% chance of one more quarter point cut at the December meeting. There’s around 130bps in total until mid/late 2026 which means a terminal or neutral rate of 3%. Consensus sees the base case as a 25bps cut which should keep USD softer and risk assets supported. A bigger cut or dovish dot plot would typically see a bigger USD drop, while gold and equities would rise. A 25bps cut, but fewer cuts going forward – for example, quarterly cuts over sequential reductions – will probably see a stronger greenback and equities pressured.
Dollar seasonals are currently modestly helping support the buck, but these fade from October. The dovish new make-up of the FOMC expected next year may also drag on USD. A Fed cutting interest rates to neutral without the economy entering recession should be good for commodity currencies.