Interest Rate Cut: One or Two? ‘Dot Plot’ Indicates a Close Call | ORBITAL AFFAIRS

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The Federal Reserve’s Outlook on Interest Rate Cuts: What You Need to Know

Key Takeaways

  • Members of the Federal Open Market Committee were on the fence about the outlook for rate cuts, with many anticipating two cuts this year, and a narrow majority seeing one or fewer.
  • The FOMC’s attitude towards rate cuts has shifted significantly since March after hotter-than-expected data on inflation.
  • Fed rate cuts could push down borrowing costs for all kinds of loans, with the first rate cut being an especially consequential move.

Members of the Federal Reserve’s policy committee currently anticipate cutting the central bank’s key interest rate just once this year, but it wouldn’t take much to change that outlook, according to a chart showing officials’ predictions for the path ahead.

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The “dot plot”—a diagram scrutinized for portents by financial markets—was released Wednesday afternoon. The dot plot shows where each of the 19 policymakers on the Federal Open Markets Committee think the interest rate will be by the end of the year.

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The median projection (the one where half were higher and half lower) was for the all-important rate to be dropped a quarter-point to the range of 5% to 5.25%.

However, the dot plot shows it was a pretty narrow decision between one and two quarter-point rate cuts. Out of the 19 members, four expected to hold the rate in its current range, seven projected one rate cut, and eight expected two.

The First Rate Cut Would Be ‘Consequential’

The number of rate cuts, and when they come, could be pivotal to the economy since financial markets could respond to a lower fed funds rate by lending out money more freely.

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“I do continue to think that when we do start to loosen policy, that will show up in a significant loosening of financial market conditions,” Federal Reserve Chair Jerome Powell said Wednesday afternoon at a press conference. “It’s a consequential decision for the economy, and you want to get it right.”

The June dot plot was a significant shift from March when the majority of policymakers projected three rate cuts. Higher-than-expected inflation in the first quarter prompted officials to scale back their rate cut expectations.

While recent inflation reports have been tamer, including data released for May on Wednesday morning, it wasn’t enough to move the needle, as Powell said most members didn’t change their projections after the new data came in.

In conclusion, the Federal Reserve’s stance on interest rate cuts is closely watched by investors and economists alike. The decision to cut rates can have far-reaching implications on the economy, affecting borrowing costs and financial market conditions. As policymakers navigate through uncertain economic waters, all eyes will be on how they steer monetary policy to support growth and stability.

For more information on this topic, you can read the original article on Investopedia.

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