FOMC preview: Why the Fed’s pivot to lower rates matters

Over the next year, we expect the Fed to cut its policy rate to at or near 3.25%, which we think is vicinity of the neutral rate in the post-pandemic economy. That rate would imply a real neutral rate, after adjusting for inflation, of around 1% to 1.5%.
Recent economic data has been solid enough, with service and housing inflation still sufficiently sticky, that there is not a majority on the committee to support a 50-basis point cut next week.
While one should not rule out 50 basis-point cuts in the coming months should labor market conditions deteriorate, for now we are projecting a series of 25 basis-point cuts this year as our baseline forecast.

The Fed’s dot plot, which serves as its members’ policy rate forecast, will feature major changes to median dots for this year and next.
We expect the median dot to decline from 5.125% to 4.375% this year (implying two 25 basis-point cuts this year in addition to next week’s cut). We also expect the median dot for next year to ease to 3.125%.

If the Fed retains its current long-run projection of a 2.8% federal funds rate, then it should be anticipated that the 2026 median dot will decline by another 25 basis points to 2.875%.