Amid global tensions, tariff worries and leadership changes at the US Federal Reserve, investors were closely watching the latest Summary of Economic Projections (SEP). The Fed has decided not to change interest rates for now, keeping them in the range of 3.50% to 3.75%. Its latest projections show that any rate cuts will be slow and limited over the next few years. The central bank still expects only a small rate cut of 0.25% in 2026.
Rate path remains unchanged
The Fed’s outlook for interest rates has not changed from its December projections. It expects the policy rate to come down to 3.4% by the end of 2026. After that, rates are likely to fall slightly to 3.1% in 2027 and remain at that level in 2028. In the long run, the Fed sees interest rates settling at around 3.0%.
The dot plot, which shows the views of 19 policymakers, indicates that most officials now expect rates in 2026 to be between 3.25% and 3.50%. “If you notice, the median didn’t change, but there was actually some movement toward — a meaningful amount of movement — toward fewer cuts by people,” Fed Chair Jerome Powell said in his post-meeting remarks. “So four or five people went from two to one, let’s say, two cuts to one cut.”
Inflation outlook rises
The biggest shift in the projections is in inflation. The Fed now expects personal consumption expenditures (PCE) inflation to be 2.7% in 2026, higher than the earlier estimate of 2.4%. Core inflation, which excludes food and energy, is also expected to be 2.7%, up from 2.5%. Even though inflation is still expected to fall over time, it is now seen coming down more slowly. It is projected to reach 2.2% in 2027 and return to the Fed’s 2% target by 2028.
Growth outlook improves slightly
The Fed has become slightly more optimistic about economic growth. GDP is now expected to grow by 2.4% in 2026, up from 2.3% earlier. Growth for 2027 has also been revised higher to 2.3%, and for 2028 to 2.1%. The long-term growth estimate has been raised to 2.0% from 1.8%, showing that the economy is holding up well even with higher interest rates.
Labour market stays steady
The outlook for the job market remains stable. The Fed expects unemployment to be 4.4% in 2026. For 2027, it has been slightly increased to 4.3%. The estimate for 2028 and the longer term remains at 4.2%. These levels are still relatively low, indicating that the Fed expects only a gradual slowdown in hiring, not a sharp rise in job losses.
Markets scale back rate cut hopes
At the start of the year, many traders were expecting two rate cuts. But those expectations have been pushed back as inflation data has remained strong. “I do not expect any market-moving news to be made during the Powell presser either. Bottom line, the chances of two cuts this year will continue to fall, regardless of who’s sitting in the Fed Chair seat going forward. 2 cuts this year will be a hard case to make for anyone with inflation spiking and uncertainty rising substantially, unless a recession hits,” said David Alton Clark, Investing Group Leader for The Winter Warrior Investor to Seeking Alpha.
Fed funds futures now suggest that there may be only one rate cut in 2026, or even none if inflation stays high. This also complicates the job for Kevin Warsh, who is expected to take over as Fed Chair when Jerome Powell’s term ends in May. Warsh has previously supported lower interest rates.
With inflation still above target, the Fed is choosing to move carefully. The projections show that the central bank is not in a hurry to cut rates, even though economic growth remains steady. Its focus is on bringing inflation down to 2% in a stable and lasting way. Policymakers believe that inflation risks are tilted to the upside, meaning prices could rise more than expected.