Fed dot plot may fade: Warsh's debut signals rate hike?
The Fed's quarterly "dot plot" rate forecast may soon lose its last rate-cut signal, or even be scrapped entirely. Then the market will have to judge whether new Fed Chair Kevin Warsh is truly the inflation hawk he has claimed to be.
The new Fed chair is busy signaling his stance and listening to staff ahead of his first policy meeting later this month. Any guidance drawn from current policy direction will be hard to give a simple answer.
The astonishing growth in AI investment and the energy price surge from three months of Iran war have pushed inflation well above target. Coupled with internal FOMC shifts, futures market sentiment has turned panicky, expecting the next Fed rate hike before year-end.
In recent months, one of the few remaining dovish arguments was that the labor market — the other side of the Fed's dual mandate — might show cracks, possibly worsened by AI-related layoffs or energy-related production cuts. But there is little sign of that so far.
Instead, signs suggest the job market remains strong and may even be improving. April job openings surged, and May private sector payrolls added 122,000, beating expectations. The May national nonfarm payrolls report due Friday will test this trend.
The Fed won't hike this month, but may plant seeds for a rate increase.
Besides any signals from Warsh at the press conference, the market will watch closely whether the Fed's previous language hinting at another rate cut is removed. At the last meeting, three governors had already voted to remove that language, and since then, at least one previously dovish governor, Waller, has joined them.
But the Fed policymakers' quarterly economic projections, including the dot plot forecasting future rate moves, may take center stage.
Current projection medians show one more rate cut this year and another in 2027.
Since March, various Fed official comments suggest the 2026 rate cut expectation is likely to disappear from the dot plot. Whether there will be a cut in 2027, or even a hike as markets expect, might shock the most.
Ironically, Warsh's aversion to so-called forward guidance may well lead him to abolish the dot plot entirely. He would have many supporters for this, including his predecessor Powell, who remains a Fed governor.
If further easing prospects are ruled out and guidance stops, leaving the market to judge based on new data, H2 rate markets could become more tense and volatile.
Of course, some investors still hope the end of the Iran war will bring easing back on the table, or that the energy squeeze on real incomes will be enough to curb household demand and thus control other prices.
But many believe the tide has turned.
Rate cut plan aborted
SGH Macro economist Tim Duy believes the inflationary consequences of rising energy prices now dominate the impact on growth, and as the Fed begins to realize that the last rate cut in December was a mistake, the internal FOMC stance is shifting rapidly.
"Fed officials see the risk of inappropriate monetary policy increasing, and they are quickly turning hawkish to pave the way for a rate hike," he said.
"The old Warsh would have hiked early," he added, referring to Warsh's long reputation as a monetary hawk. "No one knows which version of Warsh will take the stage."
Despite headwinds from energy, geopolitics, and tariffs, with the AI investment boom heating up the economy and stock market, many question why the Fed would consider further easing.
Warsh's rethink and adjustment may differ from many expectations.
