Called for rate cuts for 6 quarters, yet interest rate expectations are moving higher instead.

Title: After Six Quarters of Rate Cuts, Expectations Are Moving Upward

Author: Rhythm BlockBeats

Source:

Reprinted from: Mars Finance

In September 2024, the Federal Reserve officially began cutting interest rates. The median of the dot plot showed a clear line: by the end of 2025, the rate would be 3.4%, with four more cuts.

Six quarters have passed. Last night’s March SEP told us that this line has completely shifted.

The Fed kept rates steady at 3.50%-3.75%, which was no surprise to the market. But what happened inside the dot plot is more worth analyzing than the rate decision itself. Out of 19 members, 7 believe there should be no rate cuts this year, and 7 think there should be one cut. Perfectly split. The median remained unchanged, but the consensus has disintegrated.

Using the three charts below, we can briefly understand how the Fed has been gradually adjusting expectations based on reality, how divided their internal opinions are, and why their inflation forecasts are likely underestimating the actual situation again.

Collapse of Rate Cut Expectations

According to official Fed SEP data, when rate cuts started in September 2024, the median of the dot plot predicted a 3.4% rate by the end of 2025, implying four more cuts from the then 4.75%-5.00%.

By December’s SEP, three months later, this number jumped to 3.9%, leaving only two cuts remaining. Since then, with updates in March, June, September, and December 2025, the forecast for the end of 2025 has never returned to 3.4%. The actual end-of-2025 rate settled in the 3.50%-3.75% range, 25 basis points higher than the initial expectation.

The same pattern applies to the 2026 forecast. In September 2024, the Fed expected the rate to fall to 2.9% by the end of 2026. By last night’s March SEP, this figure remained at 3.4%, 50 basis points higher than the initial forecast.

The trends of the blue and orange lines tell the same story: rate cut cycles have indeed started, but the Fed’s own judgment on the terminal rate keeps moving upward.

This drift becomes even more apparent over a longer timeframe. In September 2024, the Fed had just lowered rates from a peak of 5.25%-5.50% to 4.75%-5.00%. At that time, market confidence in the rate cut path was high. CME FedWatch once implied a 4-5 rate cuts in 2025. But the Fed’s own forecast moved ahead—by December, they cut the expected rate cut space in half, with the blue line jumping from 3.4% to 3.9%, a 50 basis point increase in a single quarter. Since then, regardless of economic data fluctuations, this line has never returned.

In other words, just three months after the rate cut cycle began, the dot plot was already signaling a slowdown in the rate cut path.

7:7, the Fed Can’t See Clearly

The median is just a number, hiding the divisions behind it.

According to the March SEP Figure 2 dot plot (compiled by BondSavvy), the distribution of votes among 19 participants for the end-of-2026 rate is: 7 people expect no cuts, 7 expect one cut, 2 expect two cuts, 2 expect three cuts, and 1 expects four cuts.

7:7—perfectly split. Fourteen people are clustered around “no change” and “one cut,” with only five expecting more than one cut.

Compared to December’s SEP, the change is dramatic. In December, 12 participants expected at least two cuts, but by March, only five did. Fed Chair Powell confirmed this shift at the press conference: “Four to five people shifted from expecting two cuts to expecting just one.”

Such symmetric division is very rare in FOMC history. According to a 2023 study by the San Francisco Fed (Bundick & Smith), internal disagreement in the dot plot was nearly zero during the 2020 pandemic, gradually rising with the rate hike cycle. But previous disagreements mainly concerned “magnitude”—whether to raise by 25 or 50 basis points, with a consensus on the direction. The March 2026 disagreement is about “direction”: whether to cut or not.

The median remains at 3.4%, but beneath it, two camps are pulling in opposite directions.

More noteworthy is how the distribution has narrowed. The December dot plot was very wide, with some expecting large cuts and others no change. The March distribution has actually narrowed—14 dots clustered between two levels—but this isn’t a sign of consensus; it’s two opposing camps each consolidating their views. The uncertainty that was once dispersed has become concentrated disagreement. This is more dangerous than dispersion because any unexpected inflation data could cause one side to shift en masse, causing the median to jump.

The Fed Always Underestimates Inflation

The core of the rate debate is the inflation debate.

According to various SEP data, in December 2024, the Fed first projected the 2026 PCE inflation at 2.1%. Since then, each quarter has seen upward revisions: March 2025 at 2.2%, June at 2.4%, September at 2.6%. In December, it briefly fell back to 2.4%, but by March 2026, it jumped again to 2.7%. Over six quarters, the forecast was revised upward by 0.6 percentage points.

This pattern isn’t new. The 2025 PCE inflation forecast followed the same trajectory. In December 2024, the Fed predicted 2.5% for 2025, then revised upward each quarter to 2.7%, 3.0%, 3.0%, and 2.9%. According to the Bureau of Economic Analysis (BEA), the actual PCE inflation in December 2025 was 2.9% year-over-year. The Fed spent a whole year catching up, only just reaching that level in the last forecast.

Now, the Fed predicts 2.7% for 2026. The orange dashed line on the chart shows the actual 2025 value at 2.9%. Based on their historical record, 2.7% is likely just the starting point, not the endpoint. It’s not a conspiracy; it’s a pattern. The Fed’s real-time inflation forecasts over the past two years have only moved upward.

A particularly notable point is the core PCE. In March, the SEP revised the 2026 core PCE forecast from 2.5% in December to 2.7%, an upward revision of 0.2 percentage points in one quarter—the largest among all indicators. Core PCE excludes food and energy prices and is viewed by the Fed as a more reliable inflation indicator. When this forecast is revised upward, it indicates that the underlying inflation is more sticky than expected, not just driven by volatile energy prices.

In the same March SEP, GDP growth was revised slightly upward from 2.3% to 2.4%, while the unemployment rate remained at 4.4%. The economy is slightly better, inflation more persistent, but the interest rate path remains unchanged.

There’s tension among these three judgments. If inflation is more stubborn than expected, why wouldn’t the rate path change? The 7:7 split provides an answer—it’s not that the Fed believes rates don’t need to change, but that there’s internal disagreement about the inflation trajectory itself.

According to CME FedWatch, the current market pricing for 2026 is: 32.5% chance of a 50 basis point cut (two cuts), 25.9% chance of a 75 basis point cut (three cuts), and 21.1% chance of only one cut. The market’s weighted expectation of about 50 basis points is more dovish than the Fed’s median of 25 basis points. But the biggest divergence between the most probable scenario and the Fed’s median reflects the internal 7:7 split.

No one knows the answer—including the Fed itself.