Fed: Signals 25bps October and December
The median Fed Funds is a strong hint that the Fed will deliver an extra 50bps most likely with 25bps in October and December. However, the split in the 2026 Fed Funds dots forecasts from FOMC members suggests that our forecast of just below trend growth and core PCE above target will likely mean that the Fed decision will be split in Q1 2026. The Fed will have done 75bps by then. On balance, we feel that the Fed will hold and then finish the easing cycle with 25bps cut in Q2 and Q3, though the last two will be data dependent and are not guaranteed. Only if the economy sees a harder landing towards mild recession (30% probability in our view) would the FOMC consensus likely bring forward cuts into Q1 and also consider dropping the Fed Funds rate to the 2.0-2.5% area in this easing cycle.
Figure 1: Fed September Summary of Economic Projections (SEP)
Source: Fed (September SEP)
More Easing to Come
The September FOMC statement and Fed Chair Powell Q/A provide a number of clues on prospective policy. Key points include
· Inflation and growth uncertainties. The FOMC statement noted that job gains have slowed, while Fed chair Powell indicated that growth has moderated. Additionally, lower immigration and lower labor force participation plus labor demand were noted as behind the jobs slowdown and the latter cited by Powell as a downside risk. It could be that jobs growth stabilizes (the Fed central view) or alternatively NFP swing into negative territory and undermines consumer spending and business confidence. It is interesting that the median GDP profile is still consistent with a soft landing, with the median up 0.2% to 1.8% for 2026 GDP. Meanwhile, FOMC members see core PCE at 2.6% in 2026 also up 0.2% before coming down more clearly in 2027. However, Powell noted less concern on inflation than in the spring.
· Guidance on Interest rates. The median Fed Funds rate for end 2025 has the majority of the FOMC members projecting 50bps extra beyond the 25bps in September. Then only one further cut in 2026, which would bring a cumulative 100bps. The distribution for 2026 projections on the Fed Funds rate however shows a clearly split with 8 FOMC members forecasting no cut or up 25bps and 9 at least 50bps lower – with 2 looking for 25bps and hence the median. This suggests that a sizeable minority on the FOMC would be open to more than 25bps in 2026 if the employment and growth pictures slows down more than expected, but a sizeable minority could be reluctant to cut! The bond market rise in yields likely reflects this split view (though the hawks could be non voting FOMC fed district presidents), which the Trump administration appointments will not change quickly. Meanwhile, though Powell labelled the cut as a risk management cut, he also noted that the balance of risks now argued for adjusting policy towards neutral rates. The dots show the same median neutral rate at 3.1%, which is unchanged and not impacted by politics so far.
· 2025/26 rate prospects. The median Fed Funds is a strong hint that the Fed will deliver an extra 50bps most likely with 25bps in October and December. Only one dissenter in the shape of Miran for 50bps and the fact that Bowman and Waller went for 25bps alongside everybody else suggests they are in no rush to override economics for politics. The split in the 2026 dots suggests that our forecast of just below trend growth and core PCE above target will likely mean that the Fed decision is split in Q1 2026. On balance, we feel that the Fed will hold and then finish the easing cycle with 25bps cut in Q2 and Q3. This would bring policy to the neutral rate central tendency. However, the last two cuts would be data dependent, given the splits on the FOMC. Only if the economy sees a harder landing towards mild recession would the FOMC consensus likely bring forward cuts into Q1 and also consider dropping the Fed Funds rate to the 2.0-2.5% area in this easing cycle.