The Federal Reserve’s Interest Rate Cut: What to Expect Next

Key Takeaways

• Traders raised bets that the Federal Reserve would continue to aggressively cut interest rates later this year after the Fed delivered a larger-than-average 50 basis-point cut at Wednesday’s meeting.
• Wall Street expects the Fed to cut rates by another 75 basis points by the end of the year, implying one more 50-point cut in either November or December.
• Market expectations for rate cuts in 2025 also exceed the estimates policymakers laid out in their quarterly economic projections.

Traders on Wednesday upped bets that the Federal Reserve would continue to aggressively cut interest rates this year after the central bank began its long-awaited easing cycle with a 50-basis point cut.

The Fed on Wednesday lowered its federal funds rate target range to between 4.75% and 5% from 5.25% to 5.5%. The cut met investors’ expectations that the central bank would begin this rate-cutting cycle with aggressive action as it seeks to bolster a cooling labor market while sustaining inflation’s downward drift toward its 2% annual target rate; the market’s perceived odds of a 50-point cut rose from just 14% a week ago to more than 60% earlier this week.

Wall Street took Wednesday’s policy pivot as a sign of more aggressive cuts to come. Traders now see a more than 50% chance that the Fed will lower its federal funds rate target range by another 75 basis points to between 4% and 4.25% by the end of the year. With only two Fed meetings left—one in November and one in December—that implies another 50-point cut at one of those meetings.

Fed officials don’t expect this year’s rate reductions to be quite that dramatic, according to their quarterly economic projections. Nine of the 19 Federal Open Market Committee (FOMC) members who submitted forecasts estimated the policy rate would end the year between 4.25% and 4.5%. Only one member expects the next two cuts to match the market’s expectations. Two members don’t expect to cut rates at all later this year.

Policymakers expect interest rates to be slightly lower in the near term relative to their prior estimates, which were published in June. The FOMC’s consensus is that the rate will stand at 3.4% at the end of 2025, down from an estimate of 4.1% in June.

However, the long-run neutral rate, at which policy is neither restrictive nor accommodative, is forecast to be slightly higher (2.9%) than previously forecast (2.8%). Markets, meanwhile, saw a nearly 60% chance that the fed funds rate will be below 3% within the next 12 months.

Overall, the market’s expectations for future rate cuts exceed the estimates laid out by policymakers. While the Fed’s quarterly economic projections indicate a more conservative approach to rate reductions, traders and Wall Street anticipate further aggressive cuts. This disconnect between market expectations and policymakers’ estimates suggests that there may be more volatility and uncertainty in the coming months.

Investors and businesses should closely monitor the Federal Reserve’s actions and statements to gauge the direction of interest rates. The central bank’s decisions have a significant impact on borrowing costs, investment decisions, and overall economic activity. As the Fed continues its rate-cutting cycle, it is crucial to stay informed and adapt strategies accordingly.

Additionally, market participants should consider the potential implications of lower interest rates on various asset classes. Lower rates tend to boost stock prices, as investors seek higher returns in equities compared to fixed-income investments. However, lower rates can also indicate concerns about economic growth and future earnings, which may dampen market sentiment.

Furthermore, individuals with mortgages or other loans tied to interest rates should assess the potential impact of rate cuts on their monthly payments. Lower rates can provide opportunities to refinance existing debt at more favorable terms, potentially reducing overall interest expenses.

In conclusion, the Federal Reserve’s recent interest rate cut has set the stage for further cuts in the coming months. While policymakers have more conservative estimates, the market expects additional aggressive cuts. This disconnect between market expectations and policymakers’ projections introduces uncertainty and potential volatility. Investors and businesses should closely monitor the Fed’s actions and statements to make informed decisions and adapt strategies accordingly.