What Pythagoras’ theorem can teach us about the Fed

At its meeting in September, the Federal Open Market Committee (FOMC) agreed to reduce the Fed funds target range by 25 basis points to 4.00-4.25%. The decision reflected FOMC members’ views that the balance of risks facing the labour market had shifted and required a less restrictive monetary policy.

Furthermore, the ‘Summary of Economic Projections’ document signalled that the median FOMC member expects a rate cut at each of the two remaining meetings in 2025 (see Chart 1). However, looking only at the median FOMC member’s rate expectations misses the asymmetry of the distribution of expectations, which shows that there is a significant risk of a less dovish path for the Fed funds target range.

Chart 1. FOMC participants’ Fed funds target range projection for the end of 2025

Source: Federal Reserve. Data as at 17 September 2025.

Were a single FOMC participant whose expectation was for the Fed funds target range to be 3.50-3.75% by year-end to revise up their projection by 25 basis points, the median would also increase by 25 basis points. The purpose of this note is not to make a call on whether the Fed will cut rates twice more this year. It is simply to point out that market pricing does not give proper credence to the possibility that the Fed may not lower rates by 50 basis points in the remainder of 2025 (see Chart 2).

Chart 2. Market expectations for the Fed funds target range

Source: CME. Data as at 13 October 2025.

If the Fed decides not to cut rates in October, it would likely cause an adverse market reaction given current market rate expectations. FOMC members will be keen to avoid this and would likely try and guide market expectations ahead of the meeting through speeches.

One such speech was made on 6 October by Kansas City Fed President Jeff Schmid.¹ He voted in favour of the 25 basis point rate cut in September, with signs the labour market has cooled making this “an appropriate risk-management strategy as the Fed balanced the risks to inflation and employment”.

Schmid went on to say, “overall, given the state of the economy and financial markets, I view the current stance of policy as only slightly restrictive, which I think is the right place to be”. This implies that if incoming data do not suggest a further cooling of the labour market, Schmid would be likely to vote to keep rates unchanged at the October FOMC meeting.

It is important to note that this is just the view of one FOMC participant and not representative of the entire committee. However, it highlights the point that the Fed remains data-dependent and two rate cuts in the remainder of the year are perhaps not as likely as market expectations would suggest. With rate decisions finely balanced, valuable information can be gleaned by monitoring speeches of regional Fed Presidents between now and the next FOMC meeting.
 

¹ https://www.kansascityfed.org/speeches/the-federal-reserve-economic-outlook-and-monetary-policy/