Overnight, the Fed cut the Fed funds rate by 25bps to 4.25% but did not manage to out-dove the very dovish pricing ahead of the decision. After a brief rally post the release of the FOMC statement, US Treasuries sold off across the curve. Fed Chair Powell cited softening labour demand for easing but we note the contradictions that lie beneath the somewhat united voting pattern (11 voting for a 25bps cut and one dissent). We lay out the takeaways below.
First, the dot-plot now shows a median of three cuts for the year and just one for 2026. This marks a frontloading of rate cut expectations, perhaps reinforcing market pricing of close to two more cuts for the year. That said, the dots indicate that close to half of the FOMC participants see one cut or less for the rest of the year indicating a split in views. Moreover, there is a silent dissent with one dot indicating a hike by the end of the year.
Second, the contradictions between the lower dot-plot over the coming years despite firmer economic projections suggest that the Fed now has a more dovish reaction function. The Summary of Economic Projections indicate firmer GDP growth, and lower unemployment rate over the coming three years. The forecast for core PCE inflation was also bumped up for 2026. Taken together, this mix of economic variables should warrant less easing (less than the three cuts in June’s dot-plot). Instead, there was cumulatively one more cut by the end of 2026. 
The upshot is that the bond market was overly optimistic about Fed cuts heading into this meeting. While a series of cuts is to be expected, this context of easing matters. We suspect that the current cut cycle may be more of recalibration (and precautionary) rather than an aggressive cycle where the Fed needs to fend off a serious downturn. Moreover, if sentiment stays firm, there should already be considerable support to the real economy. Rate cuts into already loose financial conditions appear odd. We reiterate that 2Y and 10Y yields below 3.5% and 4.0% would be considered rich.
Our USD and SGD rates forecasts have been tweaked to reflect frontloading of Fed cuts in the coming months.
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