Decoding the Fed’s Projections: A Guide for Experts

Federal Reserve officials are set to reveal their latest economic forecasts on Wednesday, which will come paired with their decision on interest rates. This unveiling is anticipated to shed light on the central bank’s next moves during what is undoubtedly an unpredictable period.

Earlier this year, in January, the Fed hit the pause button on cutting interest rates after having reduced them by a full percentage point in the latter half of the previous year. It’s widely expected that they will hold steady again this Wednesday, as they wait for clearer insights into the future, considering factors like President Trump’s global trade war stance and the potential execution of his policy priorities, including budget cuts and immigration controls.

The looming question is twofold: when, and possibly if, the Fed will be able to resume cutting rates this year.

Back in December, the Fed’s quarterly projections indicated plans for two rate cuts amounting to a half-percentage point by 2025. However, economists now suggest that President Trump’s policies could ramp up inflationary pressures and slow economic growth, posing a tricky challenge for the Fed. This could compel policymakers to revisit their expectations for rate cuts in the upcoming forecasts.

Here’s what might change and how you can interpret these developments.

The dot plot is often the centerpiece of the Fed’s quarterly Summary of Economic Projections. It provides Fed watchers with crucial insights into interest rate expectations through 2027 and beyond. Each of the 19 Fed officials contributes a ‘dot’ that represents their predictions on a vertical scale.

Shifts in these dots are closely monitored by economists, as they can signal the future direction of policy. The median dot, in particular, grabs the most attention and is often cited as the Fed’s best guess on the trajectory of interest rates over time.

The Fed aims to balance two key objectives with its policy: maintaining low, stable inflation and ensuring a robust labor market. If inflation spikes, the Fed raises rates to make borrowing costlier, thereby cooling the economy. Higher rates can temper the housing and labor markets by lessening demand and curbing companies’ ability to hike prices, ultimately keeping inflation in check.

After managing to rein in inflation, officials initiated rate cuts in September, starting with a significant half-point reduction. Fed Chair Jerome H. Powell described this as a preemptive strategy to safeguard the economy, not an act of panic. The Fed followed up with two more rate cuts in 2024, settling rates within the 4.25% to 4.5% range.

With shifting views on inflation and growth risks, economists are predicting either one or two quarter-point cuts from officials this year.

Understanding the dot plot requires attention to how interest rate estimates align with the long-term median projection, often termed the “natural” or “neutral” rate. This figure, recently rising to 3% in December, indicates the fine line between policies designed to accelerate or decelerate the economy.

During the last meeting, Chair Powell characterized current rates as “meaningfully restrictive,” implying that the Fed sees its current policy as a necessity to keep the economy from overheating and to lower inflation. Observers will be alert to any shift in this perspective, which might signal the Fed’s outlook on their room to cut rates while addressing inflation concerns.

Although inflation has notably cooled since 2022’s peak, it hasn’t yet reached the Fed’s 2% target. Recent months have shown erratic progress, complicated by Mr. Trump’s assertive tariff plans, which raise fresh concerns about the Fed’s ability to reach its goal.

When setting their December inflation forecasts, Fed officials heightened their estimates, taking into account expected policies under another Trump administration. Back then, most anticipated the core consumer price index, minus food and energy, to meet 2.8% by year’s end. As of January, it stood at 2.6%.

Given the extensive nature of Mr. Trump’s plans, those estimates could be adjusted upward on Wednesday.

While discussing tariffs’ effects, both economists and policymakers agree they tend to elevate consumer prices, though the long-term impact on inflation remains uncertain. Much depends on the tariffs’ extent, duration, and how businesses and consumers adjust.

On top of inflation worries, there’s also trepidation surrounding economic growth. Despite record inflation and high interest rates, the labor market has remained surprisingly resilient.

December projections suggested a 2.1% economic growth rate this year, slightly more restrained than 2024’s, yet still robust. They also forecasted unemployment stabilizing around 4.3%, slightly up from its February figure.

As expectations for economic growth may dip in the latest projections, unemployment rates could climb as the broader implications of Mr. Trump’s plans to trim the federal workforce and curtail spending become clearer.

Public sentiment regarding the economy has already soured due to concerns about President Trump’s trade policies potentially slowing business investments and hiring. Still, the solid foundation of the economy keeps most economists from predicting a recession in the near future.