In One Chart: How the Fed's Dot Plot Shifted Dovish for the First Time Since the Pandemic

On Wednesday, the Federal Reserve held interest rates steady at a range of 5.25% to 5.5%, as expected, marking the third consecutive pause in rate hikes. The "dovish" dot plot reveals that over half of Fed officials anticipate cutting interest rates by at least three times next year, which equates to approximately 75 basis points. Furthermore, almost 30% of Fed officials expect a minimum of four cuts. The market was taken aback when Federal Reserve Chairman Powell, who has always been cautious about managing the market's rate cut expectations, conceded that the benchmark rate is now "likely at or near its peak for this tightening cycle" and that interest rate cut " begins to come into view" and "is clearly a topic of discussion." The market perceived this shift as the most conclusive signal to date that the Fed is concluding its two-year trend of tightening monetary policy.

Following the Fed's December decision, market expectations regarding the Fed's rate cuts have accelerated significantly. Traders are now anticipating that the Fed will begin cutting interest rates as early as March next year, with a probability rate of at least 25 basis points being as high as 90.48%, according to the CME Group's FedWatch Tool. This figure represents a substantial increase from the previous day's prediction of 41.28%.