Quick Read: What to Expect
Here's the short answer: I expect the Fed to cut rates by 75 basis points in total over the next three meetings, starting with a 25-basis-point move at the next FOMC session. The exact number – how much will the Fed cut rates – depends on a tug-of-war between cooling inflation and a slowing job market. I've covered the Fed for over a decade, and this cycle feels uniquely uncertain. Let me break down the numbers, the scenarios, and what it means for your money.
What's Driving the Fed's Next Move?
Two forces are pushing the Fed: inflation is easing, but the job market is showing cracks. The Fed's favorite gauge, core PCE, has been drifting toward the 2% target faster than most forecasters expected. Meanwhile, the unemployment rate has ticked up, and job openings have fallen below pre-pandemic levels. In my own research, I've seen a pattern: every time the three-month average of payrolls dips below 150,000, the Fed shifts to a more dovish stance. We're not there yet, but we're close. The latest CPI report from the Bureau of Labor Statistics still shows core inflation running at 2.8%, which gives the Fed room to move but not a free pass.
The Fed walks a tightrope. If they wait too long to cut, they risk a recession. If they cut too fast, they risk re-igniting inflation. That's why the market's obsession with the exact size of each cut is misplaced. The direction is clear, but the path will be data-dependent.
How Much Will Fed Cut Rates? The Base Case
My base case calls for three 25-basis-point cuts in a row, followed by a pause. Here's a snapshot of how I see the FOMC's moves unfolding, based on current futures pricing and my conversations with fund managers.
| Meeting Sequence | Expected Cut | Fed Funds Rate After | Probability in Futures |
|---|---|---|---|
| Next meeting | 25 bps | 4.50%–4.75% | 78% |
| Following meeting | 25 bps | 4.25%–4.50% | 60% |
| Third meeting | 25 bps | 4.00%–4.25% | 45% |
Notice the probabilities drop after the first move. That's because the Fed will be watching incoming data closely. If the labor market holds up, they might skip the third cut. If it weakens, they could front-load. In the base case, the funds rate settles at 4.00%–4.25% by the middle of the next two quarters. That's a 'soft-ish landing' path – not too hot, not too cold.
I'm putting the odds of that 75-bp total at roughly 60%. This comes from how the futures contracts are priced. The near-month contract implies a funds rate around 4.20%, which is exactly what you'd get after three 25-bp cuts. That's not a guarantee – the Fed has surprised me before. A single strong jobs report can push the first cut out.
What If Inflation Sticks?
Here's the non-consensus view: inflation might not cooperate. If the second round of tariffs pushes goods prices up, or if housing costs reverse their decline, the Fed could be forced to hold rates higher for longer. In that scenario, you'd see only one or two cuts, perhaps just 25 total – and maybe nothing at all.
I've been burned before by assuming inflation would fade. A couple years ago, the 'transitory' crew was wrong. Right now, 12-month core CPI is running around 2.8%, which is above target. If that number moves up even slightly, the Fed will flip to a hawkish pause. The market isn't pricing that fully yet, and that's an opportunity for tactical traders.
What If the Economy Cracks?
On the flip side, if jobless claims surge and consumer spending collapses, the Fed will act aggressively. A 50-basis-point cut is entirely off the table in the base case, but it becomes the baseline in a recession scenario. The Fed has a history of cutting fast when it's behind the curve – think of the financial crisis or even the early pandemic response. If we see a sharp spike in unemployment, I wouldn't be surprised by an emergency inter-meeting cut followed by another 50 at the next regular meeting.
That kind of move could bring the funds rate down to 3.50%–3.75% within three months. It's a tail risk, but it's not negligible – probability at maybe 20%. The last three recessions saw the Fed cut rates by an average of 450 basis points. That sounds insane now, but that's the universe of possibilities. If you think a recession is likely, you should be preparing your finances for a zero-rate world again.
How to Position Your Portfolio for Fed Cuts
You might be tempted to buy long-term bonds right away. Stop. The market has already priced in a lot. Instead, take these concrete steps:
1. Re-evaluate your debt
If you have a variable-rate mortgage or HELOC, now is the time to lock in a fixed rate or refinance. A 25-bp cut doesn't sound huge, but on a $300,000 balance, it saves about $62 a month. Over a year that's enough to cover a few dinners out – and it compounds if rates drop further.
2. Extend high-quality bond duration
Once the first cut is announced, short-term yields will fall faster than long-term yields. That means the price of 2-year Treasuries will jump more than 10-year Treasuries. If you want to capture the bond rally, focus on the 2-5 year part of the curve. I'd avoid buying long duration now because inflation risk remains.
3. Rotate into rate-sensitive equity sectors
Utilities, real estate investment trusts, and dividend-paying consumer staples tend to outperform during easing cycles. I own a basket of utility stocks and REITs specifically as a hedge against my variable-rate debt view. It's not a sexy strategy, but it works.
Let me walk you through a practical example. Suppose you have $10,000 sitting in a money market fund earning 4.5%. After the first cut, the yield might drop to 4.25%, and after three cuts, to 3.75%. That's a loss of $75 in annual interest. If you expect rates to fall further, you might move that $10,000 into a 3-year Treasury note yielding 4% now. You'd lock in a decent yield before rates fall. But be careful – if inflation spikes, long-term yields could rise, and you'd be stuck with a losing position.
4. Use the CME FedWatch tool to gauge the market's odds
I check the CME FedWatch tool every week before making any fixed-income trade. It tells you the implied probability of each cut size based on futures prices. When the probability of a 50-bp cut jumps above 20%, the market is starting to price in distress. That's a warning sign for equities.
Common Mistakes Investors Make About Rate Cuts
Over the years, I've watched investors lose money trying to game the Fed. Here are the least obvious pitfalls.
Mistake #1: Acting on the first cut. Most of the bond rally happens before the first cut – not after. When the Fed actually cuts, bond prices often fall because traders 'sell the news.' Don't buy right after the announcement; you're late.
Mistake #2: Assuming all cuts are bullish for stocks. The stock market usually declines in the 12 months following the first cut if the economy enters a recession. Look at history – most recession-driven easing cycles start with a market drawdown. Only buy stocks if you believe the soft landing is real.
Mistake #3: Ignoring the dot plot. The Fed's quarterly projections matter almost as much as the actual cut. If they lower the dot plot median to three cuts but the market expects five, the market will correct. I always compare the futures-implied path to the latest dot plot.
Mistake #4: Overreacting to the dot plot itself. The dot plot is a survey, not a promise. Many traders treat the median dot as gospel, but it's often outdated within weeks. I always compare the dots to the latest Fed speak to see if the committee has shifted.
