"Does casting Protection reduce your FC cap to 2?"
Yes and no - the Protection FC reduction is applied AFTER the cap takes effect. If your total FC is at the cap of 4 (for Ninjitsu, Bushido, Spellweaving, and, under certain circumstances, Chivalry,) then yes, it'll reduce it to 2. If you're at a cap of 2 (for Magery, Necromancy, and under other circumstances, Chivalry) casting Protection will reduce your FC to 0. (The above, of course, assumes that you have the gear to be at the cap in the first place - if not, Protection just reduces your current FC by 2.)