The Federal Reserve’s first 25-basis-point rate cut - which pushed the Fed Funds rate to its lowest level in nearly three years - turned out to be less of a fireworks show than many expected. Yes, the S&P 500 swung around in a wider range than usual, but it was tame compared to the kind of high-volatility days we’ve seen before.
The headline cut was widely anticipated, but the real story came in the details - particularly the Fed’s infamous “dot plot.” This chart lays out the interest rate expectations of the 19 Fed governors. According to the latest version, the consensus is for a Fed Funds rate of about 3.6% by the end of 2025. Translation: two more quarter-point cuts are likely. Looking further ahead, the dots suggest one cut in 2026 and another in 2027.
Now, here’s the catch: the dot plot has a long history of being dead wrong. The Fed changes its mind constantly, and markets know it. In fact, the market reaction yesterday was telling - investors cheered the likelihood of two more cuts this year but weren’t thrilled with the idea of only two more in the following two years. Investors appear to be hesitant to trust the Fed at this point.
Source: Federalreserve.gov
However, FedWatch is already pricing in an 84% chance of two more cuts in 2025, and I agree - October and December cuts look nearly certain.
And remember: Jerome Powell’s term as Fed Chair ends in May 2026. President Trump is already interviewing potential successors, and odds are high that the next chair will be someone willing to cut rates more aggressively. That makes the current dot plot for 2026 and beyond basically worthless.
So What Does This Mean For Investors?
It’s bullish. Lower rates heading into 2026 create a tailwind for stocks - especially sectors like biotech and homebuilders, both of which outperformed yesterday. I’m also watching small caps closely, particularly those that are already profitable.
That said, let me raise one caution flag. Even in a bullish backdrop, I expect at least one healthy 5% pullback in the overall market before year-end. If (or when) it comes, I’ll be ready - with cash on the sidelines and a shopping list of stocks. Every dip in this environment should be viewed as an opportunity.
Here’s to the future,
Matt McCall
Editor, Market Insights
