The Federal Reserve's predictive stance on interest rate reductions, inflation rates, and employment levels in the coming months of the year.
The Federal Reserve has announced its latest economic projections, including a projected rise in inflation and interest rate cuts for the remainder of 2025. The Fed's preferred inflation gauge, the PCE index, is projected to rise to 3% this year, with the unemployment rate estimated to increase to 4.5% in the median forecast, ranging from 4.2% to 4.6%.
At its recent meeting, the Federal Open Market Committee (FOMC) lowered the benchmark federal funds rate to a new range of 4% to 4.25%. The Fed's dot plot shows two more interest rate cuts this year, with 25-basis-point cuts projected at the central bank's October and December policy meetings.
The pace of rate cuts is projected to slow in 2026 and 2027, with median estimates of 3.4% and 3.1%, respectively. Economic growth is projected to be 1.6% real GDP in 2025, rising to 1.8% in 2026, and 1.9% in 2027.
The decision to cut rates was due to signs of softness in the labor market in recent jobs reports. Bill Adams, chief economist for Comerica Bank, stated that 10 FOMC members favor lowering rates by at least another half percent by the end of 2025. However, nine FOMC members favor a quarter percentage point or less of additional cuts.
Stephen Miran, a new FOMC member and President Trump's chief economic advisor, advocates for a further interest rate cut of 1.25% in September 2025. Miran is the clear outlier in the economic projections, as he is the only member calling for such a significant rate cut.
Seema Shah, chief global strategist at Principal Asset Management, stated that the dot plot showing two more cuts this year reinforces the notion that today is the first in a sequence of cuts. Michael Pearce, deputy chief U.S. economist at Oxford Economics, shared similar sentiments, stating that the Fed's actions suggest a more dovish stance moving forward.
Core PCE, which excludes volatile food and energy prices, is projected to reach 3.1% in 2025. For next year, the unemployment rate is projected to be 4.4%, in a range of 4% to 4.6%. The Fed's decision to cut rates and its projections for the economy moving forward will have significant implications for businesses and consumers alike.
