Key Highlights

• We expect the SEP dots from Wednesday’s FOMC meeting to indicate one less cut for 2025 than was projected before
• Uncertainty continues to keep the Fed from being prescriptive about policy, but more hawkish dots could upset the market
• While different sources give different readings regarding inflation expectations, the Fed will err on the side of keeping a lid on them

View chart pack

Hawkish dots could be a surprise

EXHIBIT #1: MARKET EXPECTS A SHALLOWER RATE CUTTING PATH

_{Source: BNY Markets, Bloomberg}

No rate move is expected at Wednesday’s FOMC meeting this week, but a new Summary of Economic Projections will be released, which could move markets. In addition to no change in interest rates, we expect the dots for the 2025 federal funds rate projection to move higher, indicating that fewer than two rate cuts are foreseen by the Committee this year. Given current market expectations of nearly two full cuts this year, if we’re right about the new SEP on Wednesday, this could cause a bit of market consternation stemming from a relatively hawkish outcome.

As shown in Exhibit #1, the market has already been getting more hawkish about rate expectations this year, and into next. Compared to where the forward curve implied rates were after the previous FOMC meeting in early May, expectations as of this writing have moved higher, parallel to where they were back then, but higher across the board. By April 2026, rates are expected to be just north of 3.5%, indicating between three and four cuts between now and then. This is about a full rate cut less than was expected for April back after the last FOMC. Still, the December 2025 market-implied rate is around 3.85%, suggesting nearly – but not quite – two cuts for the remainder of this year. This could be contradicted by the dots at this Wednesday’s meeting.

EXHIBIT #2: DOTS TO MOVE TO THE RIGHT?

_{Source: BNY Markets, Board of Governors of the Federal Reserve System}

Exhibit #2 shows the distribution of FOMC members’ forecasts submitted in December last year and those from this past March. Recall that the current effective fed funds rate is trading at around 4.33%, and the top of the target range is 4.5%. Back in December, the range of dots was centered around the 3.88%-4.12% bucket or around one to one-and-a-half rate cuts by the end of 2025. Nevertheless, there were a good number of projections to the left of that range. A weighted average for December suggests that the mean dot at that time was just under 4% (or two cuts). The March weighted average mean was some 15bp higher, at around 4.13%, with much fewer dots to the left of the distribution.

Like the market, the Fed has become progressively more cautious on 2025 rate cuts, and we think that directional evolution will continue with the June SEP due out on Wednesday. This view is motivated not just by the behavior of the Committee over the previous two SEP meetings, but also by the rhetoric from a number of Fedspeakers before the Committee went on blackout two Fridays ago. Inflation remains top of mind for most of the members who shared their thoughts with the market, and given the continued uncertainty related to policy, the Fed is unlikely to soften its rate view. After June, there will be only four FOMC meetings remaining in 2025, and it will be increasingly unlikely there is time for an aggressive easing cycle this year.

The central issue handcuffing the Fed, beyond the obvious uncertainty, is its concern that tariffs – the ultimate form and substance of which have yet to be determined – could contribute to inflation expectations staying elevated, and if policy loosens too early or unwarrantedly, these expectations could become cemented, leading to an undesirable outcome on prices. Even with better-than-feared inflation prints last week, central bankers would argue that it has only been a couple of months since tariffs went into effect, and a number of factors may have prevented tariff charges from being passed through right away. The need to stay on top of inflation expectations remains paramount, they would also say.

Inflation expectations are key

EXHIBIT #3: INVERTED TERM STRUCTURE FOR INFLATION EXPECTATIONS

_{Source: BNY Markets, Bloomberg} 

Indeed, inflation expectations have behaved in an interesting manner in recent months. Exhibit #3 shows the breakeven inflation rates implied by the bond market. We plot a “term structure” of these expectations, indicating the difference between nominal U.S. sovereign bonds and their inflation-indexed counterparts at similar maturities. This difference is the expected average annual inflation rate over the time horizon in question. In the chart, the first few years are indeed posting somewhat elevated expected inflation, well above what was expected for the first few years of the analysis back at the end of 2024. Nevertheless, inflation expectations cool as we look further into the future, with Year 3 and beyond registering roughly the same inflation outlook beyond four years as was expected nearly six months ago.

EXHIBIT #4: SURVEY DATA ON INFLATION EXPECTATIONS MIXED

_{Source: BNY Markets, University of Michigan, Federal Reserve Bank of New York}

Survey-based inflation indicators are similar. They show an increase in expected inflation one year into the future, but something much less high in three or five years, depending on the horizon specified in the particular survey. In Exhibit #4 we show data from the University of Michigan Survey of Consumers as well as the New York Fed’s Survey of Consumer Expectations. We plot the one-year ahead expectations for both surveys, as well as the 5-year expectations from the Michigan survey and the 4-year expectation from that of the New York Fed. In both cases we observe elevated 1-year inflation. The Michigan expectation is strikingly high, at 6.5%, while the 5-year is also quite strong, at 4.4%. The New York Fed shows a much more subdued reading for both near- and longer-term inflation expectations. Among the two surveys and the bond-implied break-evens, there clear is disagreement even about 1-year inflation, never mind longer-horizon views. This is a red-letter example of uncertainty hamstringing the Fed.

Ultimately, the press conference after the meeting will be key as well, although like last month’s, we don’t expect anything prescriptive from Chair Powell. The four areas of policy uncertainty to which the Fed always refers: trade (tariffs), immigration, the budget, and regulatory policy will be repeated, and therefore given lack of definitive clarity on these items, very little in guidance can be expected. We expect the Chair to point out that there is a chance the policy mix and evolution of the economy will lead to “tension” between the two elements of the Fed’s mandate – higher pressure on prices and weakening employment. In this case, the Fed has declared that it would “consider how far the economy is from each goal and the potentially different time horizons over which those respective gaps would be anticipated to close.” This is a clear statement of intent, but one that could run up against a complicated reality, an eventuality that we probably don’t have to confront for some time.

Chart pack