The Fed’s ‘Difficult Situation’: Reading Between the Lines of the September Dot Plot
Inflation is sticky, but the labor market is cooling. How will the Fed handle rate cuts from here?
Key Takeaways
- The Federal Reserve “dot plot” showed a wide dispersion in expectations for the path of interest rates after the central bank’s rate cut on Wednesday.
- An unusual combination of sticky inflation and a cooling labor market complicates the Fed’s calculus for future rate cuts.
- Concerns about the Fed’s independence have intensified this year, but Chair Jerome Powell remains adamant that they will not be swayed by political pressure.
While there was little doubt that the Federal Reserve would cut interest rates on Wednesday, much less certain is the path the central bank will take as it navigates the conflicting trends of a weakening jobs market and stubbornly high inflation.
There was a wide range of forecasts among Fed officials in the so-called “dot plot” for the path that interest rates could take. While additional rate cuts appear to be in store after Wednesday’s quarter-point reduction, the degree to which the Fed acts will depend on how these key economic forces play out.
FOMC Federal Funds Rate Projections: September 2025
Compounding the situation, two factors affecting the economy are beyond the Fed’s control and challenging to assess. One is the inflationary impact of President Donald Trump’s tariffs. The second is dramatic changes to the supply of the labor market due to the collapse of immigration in response to federal government policies.
Put it all together, and Fed officials are facing “quite a difficult situation,” Chair Jerome Powell said in his press conference on Wednesday. It was a point he emphasized repeatedly throughout the session.
“While the outcome of today’s meeting was nearly a foregone conclusion, the path through the remainder of 2025 into 2026 remains much less clear,” says Dominic Pappalardo, chief multi-asset strategist at Morningstar Wealth. “The balancing act of containing inflation vs. employment and economic stability does not appear to be subsiding, and the Fed’s own rate forecast confirms the wide range of outcomes.”
Hanging over the meeting was another factor, one that Powell asserted is playing no role in the Fed’s decisions: Trump’s efforts to pressure the Fed into cutting rates, along with the presence of a new (albeit temporary) governor, Stephen Miran. Miran has served as chair of the Council of Economic Advisers in the Trump administration, and he did not resign from his role at the White House upon joining the Fed.
A ‘Wide Range of Outcomes’ for Rates and the Economy
In a long-awaited move, the Fed reduced its funds rate target by 0.25 percentage points to a range of 4.00%-4.25%. Less routine was the story the policy-setting committee’s projections told about the Fed’s expectations for rates and the economy.
The so-called “dot plot”—officials’ collected projections for rates and the economy in the years ahead—reflected this, projecting what Powell called a “wide dispersion” of views. Officials expect more cuts than they did in June, but they also expect growth to accelerate while inflation remains sticky and the unemployment rate inches higher.
Of 19 voting members, the median official expects two or more 25-basis-point reductions to interest rates this year, according to the projections. That indicates that “the doves on the committee are now in the driver’s seat,” says Simon Dangoor, head of Fixed Income Macro strategies at Goldman Sachs Asset Management.
But there was certainly no consensus. Seven committee members expect no further cuts, while two expect one cut. Powell called those differing forecasts “understandable and natural” in the context of a “highly unusual” situation for the economy.
Central bankers were also divided in their expectations for inflation over the next few years, though the majority expected PCE inflation to end 2025 at 2.9%-3.0%. The Fed targets 2% PCE inflation over the long run. The median official expects the unemployment rate to rise to 4.5% by the end of the year before falling in 2026.
The Fed’s Tough Spot
Sticky inflation and elevated unemployment are the crux of the Fed’s current policy dilemma. Adjusting benchmark interest rates, which is the agency’s main tool, requires central bankers to favor one mandate over the other.
“Powell is going to need to justify why the dots show more cuts in 2026 with lower unemployment and higher inflation than projected in June,” says Christopher Hodge, chief US economist at Natixis. “The dots are an awkward amalgam of predictions that are not easily explained, but still, the dovish dot plot seems in conflict with the projected inflationary/labor dynamics.”
For now, Fed officials have decided that the weakening labor market presents a more urgent risk to the economy than elevated inflation, which many analysts have argued will ease once the initial impact of Trump’s tariffs fades.
Politics in Play
Wednesday’s decision comes against the backdrop of escalating political scrutiny. Trump and other White House officials have ramped up their criticism of Powell and the central bank for not lowering rates before now. Fueling concerns about the Fed’s independence are legal proceedings surrounding Trump’s attempt to fire Fed Governor Lisa Cook, which are still ongoing.
The scrutiny intensified in the wake of Miran’s recent confirmation to the Fed’s board. He has been an advocate for looser monetary policy and cast a dissenting vote on Wednesday in favor of a larger rate cut.
In his remarks on Wednesday, Powell emphasized that the Fed will not be swayed by political considerations. “We’re strongly committed to maintaining our independence,” he said.
“This is still a largely apolitical policymaking body that is dealing with an incredibly tough economic environment and doing its best to preserve independence,” adds Hodge of Natixis. “There are institutional and possibly legal bulwarks against eroding that independence, and no cracks are obvious from this meeting.”