• The Federal Reserve lowered the target range for the federal funds rate by 25 basis points to 4.00–4.25%.
  • New economic projections, or the dot plot, signal two additional cuts in 2025, putting the year-end rate at 3.675%.
  • The Summary of Economic Projections shows a slightly more optimistic growth and unemployment outlook, while inflation is expected to persist above target through 2026.

The Federal Open Market Committee delivered a widely anticipated quarter-point interest rate cut on Wednesday while sketching a path for a gradual easing of policy through next year. The committee's updated projections indicate a more cautious approach than some market participants had hoped for, with the median forecast now pointing to a year-end 2025 rate of 3.675%, down from the 3.875% forecast in June.

Officials notably revised their long-run neutral rate estimate higher, to 3.125% from 3.00%, a move that suggests a structural shift in the underlying economy. The new forecasts also introduced projections for 2028 for the first time, anchoring the expected terminal rate at that elevated neutral level.

While the disinflation narrative remains intact, the latest dot plot reveals a bumpier path than previously envisioned. The median core PCE inflation forecast for 2026 was revised up to 2.6% from 2.4%, pushing the return to the Fed's 2% target further out. Officials now see core PCE hitting 2.1% in 2027 and finally reaching target in 2028.

"The committee remains highly attentive to inflation risks," the post-meeting statement said, maintaining language that the economic outlook is uncertain. The vote was not unanimous, with two officials dissenting in favor of holding rates steady, according to people familiar with the matter, highlighting the ongoing debate within the central bank.

Conversely, the growth and employment pictures brightened. GDP growth projections were nudged higher for each year through 2027, and the unemployment rate is now seen dipping to 4.2% by 2028, suggesting confidence that the economy can continue to run hot without immediately re-igniting price pressures. The 2025 unemployment forecast was held steady at 4.5%.

Market reaction was muted immediately following the release, with Treasury yields holding steady and equity futures ticking slightly lower. The focus now shifts to Chair Jerome Powell's press conference, where he is expected to elaborate on the conditions needed for the projected two additional cuts in 2025 and to address the committee's increased estimate of the neutral rate.