The Fed’s rate cut masked large internal differences about where policy is going
The Federal Reserve found plenty of unity this week to push through a quarter percentage point interest rate reduction, a decision that nonetheless masked substantial divisions among officials over what’s ahead. Countering Wall Street expectations for multiple dissents, the rate-setting Federal Open Market Committee on Wednesday voted 11 to 1 in favor of the reduction. However, the “dot plot” of individual participants’ expectations told a different story: A sharp divide on how many more cuts should happen this year and the next three, along with wide dispersions on forecasts for gross domestic product, inflation and unemployment. So while the final rate vote was lopsided, supporting documents for the committee’s Summary of Economic Projections showed considerable uncertainty on the future. “After the great financial crisis, I thought, well, the interesting times are over,” said Dan North, chief economist at Allianz Trade North America. “No, those were just the beginnings. It seemed like here’s another perfect example.” In short, the SEP showed that officials don’t expect inflation to hit the Fed’s 2% target until 2028, while unemployment holds rate holds fairly steady and the economy avoids recession. However, bands within those forecasts were fairly wide as uncertainty holds over the labor market and prices. To be sure, the differences in the dot plot and SEP were primarily measured in tenths of a percentage point that easily could swing either way depending on how future developments impact the quarterly updates. But in today’s world of policymaking, where the data increasingly tells a story of a weakening labor market and stubborn inflation — stagflation, or stagflation-lite as some economists call it — such marginal differences can have outsized impacts. A wide net Wall Street commentary noted the unusual dynamics. “The dot plot of median rate expectations revealed a remarkable degree of dispersion,” said Gregory Daco, chief economist at EY-Parthenon. “Although the median projection pointed to two additional rate cuts in October and December, the range of views was striking.” Indeed, those favoring two cuts prevailed by just a 10-9 margin. For 2026, a whopping 1.25 percentage points — equivalent to five rate moves — separated the two most hawkish officials from the two most dovish. The dispersion was even wider for 2027 when the “Miran dot” — presumed by most observers to belong to newly minted Governor Stephen Miran — sat alone at the bottom of the grid, pointing to a funds rate targeted between 2.25% and 2.5%, or 1.75 percentage points below the current level. As he sought herd central bank cats, Chair Jerome Powell emphasized the importance of using the grid less as establishing targets and more as a set of possibilities. The chair’s advice was “a flash of complete intellectual honesty,” wrote Nick Colas, co-founder of DataTrek Research. “Yes, part of his motivation here is to preserve the FOMC’s options,” Colas said in his daily newsletter. “But the fact that he needs to do that about near-term rate decisions is telling.” The ‘Miran dot’ and the Fed’s future Then there’s that Miran dot. President Donald Trump’s latest appointee, ushered to the meeting Tuesday just after being sworn in amid questions of whether he’d even fill out his dots and SEP projections, showed himself thus far to be an outlier rather than someone positioned to enforce his boss’s agenda for dramatically lower rates. Moreover, White House officials including Treasury Secretary Scott Bessent have maintained that Miran’s stint on the Fed will be brief, likely ending when the unexpired term he was selected to fill runs out at the end of January 2026. That’s three meetings. After that, his dot goes away. In the meantime, his time at the Fed could be instructive for future Trump appointees that moving monetary policy is more about consensus-building than being a gadfly “shadow chair.” “The only way for any voter to really move things around is to be incredibly persuasive, and the only way to do that in the context in which we work is to make really strong arguments based on the data and understanding of the economy,” Powell said at his post-meeting news conference. The chair, though, also has work cut out for him until his own term expires in May 2026. His challenge between now and then will be putting bumpers around the labor market while not driving inflation higher at a time when the price impact from Trump’s tariffs is far from certain. “Tensions within the Fed’s dual mandate of price stability and maximum sustainable employment are at the heart of several inconsistencies inside the Fed’s rate, growth, inflation and unemployment forecasts,” wrote Joseph Brusuelas, chief economist at RSM. “The forecast now rests upon just how entrenched the Fed’s credibility is and where public and professional inflation expectations will move over the next year,” he added. “Should prices rise above the Fed’s forecast, persistent inflation could be the outcome.” ( Learn the best 2026 strategies from inside the NYSE with Josh Brown and others at CNBC PRO Live. Tickets and info here . )
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