The Biggest Focus of Tonight's US Fed Decision: Will There Be One or Two Interest Rate Cuts This Year?

Growing uncertainty surrounding the direction of tariffs and oil prices, as well as their impact on inflation, is heightening a risk ahead of tonight's US Fed decision: that Fed officials may not be able to cut interest rates twice this year as they had previously anticipated...

The US Fed is set to announce its June interest rate decision at 2 a.m. Beijing time on Thursday, and it is easy to foresee that the "dot plot," which reflects Fed officials' expectations for interest rate policy changes this year, will clearly be the focus of many market participants at that time.

In the previous dot plot released in March, the median expectation of Fed officials indicated two interest rate cuts before the end of this year. Meanwhile, federal funds rate futures traders currently believe there is only a 37.7% probability that the Fed will actually cut interest rates less than twice!

Andthis clearly poses a significant risk to tonight's market: if the June dot plot reflects only one interest rate cut expected this year, will investors who are "full of anticipation" for two cuts be greatly disappointed?

Matthew Ryan, head of market strategy at financial services firm Ebury, said in an email on Monday that the company believes two interest rate cuts this year will still be the baseline expectation for most Fed policymakers. Given the significant uncertainty surrounding current tariffs, they may not have enough confidence to substantially change their views. However, there is also a risk thata minority of officials believe the number of interest rate cuts this year will be fewer than previously expected, which could be enough to tilt the decision-making balance toward only one cut (25 basis points) in 2025."

He added, "A hawkish dot plot, combined with Powell's remarks emphasizing no rush to cut interest rates, could provide some room for the US dollar to strengthen in the second half of this week."

Over the past three months, Fed officials have consistently expected the inflation rate and core inflation rate for 2025 (based on their preferred inflation indicator, the PCE price index) to reach 2.7% and 2.8%, respectively, before gradually declining to the target level of 2% in 2027 and beyond.

Since December last year, they have also "held steady" for three consecutive policy meetings, maintaining the federal funds rate target between 4.25% and 4.5%. Currently, traders generally expect Fed policymakers to implement the first interest rate cut of 2025 in September.

In fact, the risk factors that have made the Fed reluctant to cut interest rates sooner have been present and continue to accumulate recently.

US President Trump announced a 10% base tariff on most imported goods on April 2, and during the 90-day suspension period for reciprocal tariffs he set (which will expire in July), there is still a lack of a permanent solution to this trade war, exacerbating the uncertainty surrounding the inflation outlook. Additionally, the conflict between Israel and Iran that erupted late last week has continued into its fifth day, exacerbating oil price volatility and sparking concerns that supply disruptions could trigger a new wave of inflation.

Greg Faranello, head of US rates trading and strategy at New York-based AmeriVet Securities, said market participants would react on Wednesday to "the dot plot and how it correlates with the US Fed's inflation forecast."

Faranello noted that if the Fed's latest dot plot projects only one interest rate cut in 2025, this could be perceived as "more hawkish" and might lead to an increase in short-term interest rates, such as the 2-year US Treasury yield. This could present a buying opportunity for some investors.

Faranello wrote that Treasury yields have been experiencing sideways movement for about two months, with participants in the interest rate market stating, "We don't know what's going to happen next." Faranello also mentioned that the Fed might not cut interest rates at all this year.

Faranello believes that traders may not focus too much on the Fed's updated interest rate projections for 2026 and 2027 compared to the expectations for this year's rate path on the dot plot, given the significant uncertainties surrounding the inflation outlook. Moreover, they may react more cautiously to Fed Chairman Powell's press conference, as the Fed Chairman's term is set to end next year, and Trump will be seeking a successor.

"The overall trajectory of interest rates will definitely be lower—that's for sure. The question is how quickly we get there," the strategist added.