The Fed Cut Interest Rates Wednesday, But the Path Ahead Is Much Less Clear

Markets fastidiously try to gauge what the Federal Reserve will do with interest rates, but central bank officials’ projections released Wednesday show even they aren’t sure what’s coming next.

Fed officials agree on the economic outlook—moderate growth, stable unemployment, and slowing inflation—and the general need to lower rates. However, they are split on how aggressive those rate cuts should be, with some foreseeing a need for more cuts than others.

“Policymakers continue to disagree fervently on the merits of further easing, setting the stage for knife-edge votes at the final two meetings of this year,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients.

When asked about the sharply differing views, Fed Chair Jerome Powell told reporters it was “understandable and natural in the current situation” and that it was “not incredibly obvious what to do.”

The Fed is being pulled in different directions. The job market has weakened recently, suggesting the Fed should stimulate the economy by cutting rates. Inflation remains elevated, however, and cutting rates too much could keep prices higher. The effects of tariffs also remain a big question mark.

“Forecasting is very difficult, even in placid times,” Powell said, adding that it’s unlikely any economist has “great confidence in their forecast right now.”

He framed Wednesday’s action as a “risk management cut,” underlining the Fed’s view that it’s putting a greater focus toward the risk of unemployment rising. 

Fed officials’ projections, however, are still instructive and suggest a split on how they’re viewing those dueling risks.

Two More Rate Cuts This Year?

The headline for markets was that two more 25-basis-point rate cuts are coming this year—presumably one each at the Fed’s next meetings in October and December.

That, however, is based on the median projection from the 19-member Federal Open Market Committee, where two clear camps are forming.

The slightly bigger one won the day, tilting the median Fed view toward two cuts this year. Nine officials support that action, while one would back an even more aggressive cut that would slash rates to just below 3%. That is presumably the Fed’s newest governor, Stephen Miran, who had been a top White House economic adviser until his confirmation to the Fed this week.

But the hawkish camp is almost as big, with nine officials signaling more restraint. Two Fed officials indicated they’d support one more cut, but six would prefer the Fed keep rates as-is after Wednesday’s cut. One other member seemingly disagreed on the need to cut rates on Wednesday.

What About 2026?

Fed officials agree lower rates are needed in 2026 but hold varying views on how many.

Ultimately, the median projection shakes out to just one more cut in 2026 following the two cuts penciled in for this year. That would put the Fed’s benchmark rate at just below 3.5%. 

In recent weeks, markets have been expecting a more aggressive path of cuts in 2026. They may get their wish, Tombs wrote, since jobs data may weaken further in the months ahead and bolster the case for cuts.

“We expect the hawks to be won over by the data,” Tombs wrote.

For now, the Fed’s projections showed a “growing divide on the Committee amid a transition period for the Fed’s roster and path of monetary policy,” wrote Ian Lyngen, a rates strategist at BMO Capital Markets.

The Fed’s views could also shift as the data on inflation and unemployment change. Powell reminded the public that Fed policy is “not on a preset course” and that the Fed is in a “meeting-by-meeting situation.” 

“Rather than looking at this as certainty, I would encourage people, as always, to look at the [projections] through the lens of probability,” Powell said.

Newest Dot

The Fed’s projections are anonymous, but one dot was clearly lower than the others for 2025.

Analysts believe Miran foresaw rates going down to below 3% this year, a far more aggressive pace of easing than the rest of Fed officials forecast. 

Assuming he’s also the lowest dot for 2026, he is not alone—one other Fed official also sees a need to put rates just above 2.5% in 2026. However, 17 other Fed officials think rates should be higher than that, and some significantly so.

Powell was asked about Miran joining the Fed, and he emphasized FOMC decisions are made by committee. It is “in the DNA” of the FOMC to debate the economy’s progress and convince fellow officials that a certain policy shift is necessary, Powell said.

“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 one’s understanding of the economy,” Powell said. “That’s really all that matters, and that’s how it’s going to work.”