The Federal Open Market Committee’s (FOMC) latest dot plot indicates that interest rates will average 3.9% by the end of 2025, matching the December projection.
If this forecast comes true, the Federal Reserve (Fed) could implement two 25 basis points (bps) rate cuts or a single 50 bps cut in 2025.
In 2026, rates are projected to fall to 3.4% and 3.1% in 2027, as projected in the December dot plot. The longer-term forecast remains at 3.0%.
The Fed also revised its economic projections. US GDP is now projected to reach 1.7% this year, down from the previous forecast of 2.1%. For 2026, the economy is expected to grow by 1.8%, below the 2.0% estimated in December.
The unemployment rate is expected to rise to 4.4% by the end of 2025, compared to the 4.3% previously estimated. For 2026 and 2027, it remains unchanged at 4.3%, in line with the December forecast.
Finally, PCE inflation is estimated to rise to 2.7% by the end of the year, up from the 2.5% previously forecast. In 2026, inflation is expected to ease to 2.2%, slightly higher than the 2.1% projected in December. By 2027, the PCE index is expected to reach 2.0%, meeting December's expectations.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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