Key Focus of Tonight’s Fed Decision: One or Two Rate Cuts This Year?
Uncertainty surrounding tariffs, oil price trends, and their intensifying impact on inflation is raising the stakes for tonight’s Federal Reserve decision, with the risk that Fed officials may not be able to cut rates twice this year as previously anticipated.
The Federal Reserve is set to announce its June interest rate decision at 2 p.m. Eastern Time on Wednesday. Unsurprisingly, the “dot plot,” which reflects Fed officials’ expectations for interest rate changes this year, will likely be a focal point for many market participants.
In the March dot plot, the median expectation of Fed officials indicated two rate cuts by the end of the year. Meanwhile, federal funds futures traders currently estimate a 37.7% probability that the Fed will cut rates by less than two times.
This sets the stage for significant market risk tonight: if the June dot plot suggests only one rate cut for the year, investors expecting two cuts may face disappointment.
Fed’s Policy Outlook and Risks
Matthew Ryan, market strategist at financial services firm Ebury, stated in an email on Monday that the company believes two rate cuts will remain the baseline expectation for most Fed policymakers. Given the significant uncertainty surrounding tariffs, they may lack sufficient confidence to materially shift their stance. However, Ryan noted a risk that a minority of officials might project fewer cuts than previously expected, potentially tipping the balance toward just one 25-basis-point cut in 2025.
He added, “A hawkish dot plot, combined with remarks from Powell emphasizing no rush to cut rates, could provide some room for dollar strength in the second half of this week.”
Over the past three months, Fed officials have consistently projected 2025 inflation and core inflation (based on their preferred PCE price index) at 2.7% and 2.8%, respectively, gradually declining to the 2% target by 2027 and beyond. Since December last year, the Fed has held the federal funds rate steady at 4.25% to 4.5% for three consecutive meetings. Traders widely expect the Fed to implement its first rate cut of 2025 in September.
External Pressures and Market Reactions
In fact, risks preventing the Fed from cutting rates sooner have been mounting. On April 2, U.S. President Donald Trump announced a 10% baseline tariff on most imported goods. With a 90-day tariff suspension period set to expire in July, the ongoing trade war lacks a permanent resolution, adding to uncertainty in the inflation outlook. Additionally, the conflict between Israel and Iran, now in its fifth day as of last week, has heightened oil price volatility, raising concerns about supply disruptions potentially triggering a new wave of inflation.
Greg Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York, noted that market participants will react to “the dot plot and how it aligns with the Fed’s inflation forecasts” on Wednesday. Faranello pointed out that if the latest dot plot projects only one rate cut for 2025, it could be perceived as “more hawkish,” potentially driving up short-term rates, such as the 2-year Treasury yield, creating buying opportunities for some investors.
Faranello wrote that Treasury yields have been range-bound for about two months, with rates market participants noting, “We don’t know what’s going to happen next.” He also suggested that the Fed might not cut rates at all this year.
Faranello believes traders may pay less attention to the Fed’s updated 2026 and 2027 rate projections compared to this year’s outlook, given the significant uncertainty in the inflation outlook. Additionally, he noted that traders might react cautiously to Fed Chair Powell’s press conference, as his term ends next year, and President Trump will seek a successor.
“The overall trajectory of rates will definitely trend lower—that’s certain. The question is how quickly we get there,” the strategist added.