Warsh's Debut Preview: Dot Plot May Fade, Rate Hike Signals Emerge

The Fed's quarterly 'dot plot' rate forecasts may soon lose their last rate-cut signal, and the chart itself could even be eliminated. The market will then have to judge whether Warsh is truly an inflation hawk as he has previously indicated. If so, it might surprise many investors.

The new Fed Chair is busy staking out his position and consulting with staff ahead of his first policy meeting later this month. Any guidance he provides about the policy path will not yield a simple answer.

The staggering growth of AI investment, along with the energy price surge from the three-month Iran war, has pushed inflation well above the target. Combined with internal FOMC uncertainties, futures market sentiment has turned panicky, expecting the Fed's next rate hike before year-end.

In recent months, one remaining argument for doves has been that the labor market—the other side of the Fed's dual mandate—could show cracks, exacerbated by AI-related layoffs or energy-related production cuts. But there is little sign of that.

Instead, signs suggest the job market appears strong, possibly even improving. April job openings surged, and May private sector payrolls added 122,000, beating expectations. The national nonfarm payrolls report for May, due Friday, will test this trend.

The Fed will not hike this month but may plant seeds for a hike.

Apart from any signals from Warsh at the press conference, the market will closely monitor whether the Fed removes the hint of another rate cut in its statement. At the last meeting, three governors voted to delete that language, and since then, at least one recently dovish governor, Waller, has joined them.

But the quarterly economic projections from Fed policymakers, including the 'dot plot' forecasting future rate paths, may be the focus.

The current median projection shows one more rate cut this year and another in 2027.

Since March, Fed officials' comments suggest that the rate cut expectation for this year is likely to disappear from the dot plot. Whether 2027 will show a rate cut, or even a rate hike as the market expects, may have the greatest impact.

Fig: Changes in Fed dot plot projections

Of course, the irony is that Warsh's distaste for so-called forward guidance may lead him to scrap the dot plot altogether. He would have many supporters—including his predecessor, Powell, who remains a Fed governor.

If the prospect of further easing is removed and guidance is halted, allowing the market to judge based on new data, the interest rate market could become more tense and volatile in the second half.

Of course, some investors still hope that the eventual end of the Iran war will bring easing back on the table, or that the impact of energy tightening on real incomes will curb household demand and control other prices.

But many believe the tide has turned.

Rate Cut Plans Abruptly Halted

Tim Duy, economist at SGH Macro, believes the inflationary consequences of rising energy prices now dominate the impact on growth, and as the Fed begins to realize that last December's rate cut was a mistake, the FOMC's stance is shifting rapidly.

'Fed officials are increasingly aware of the risk of inappropriate monetary policy and are quickly turning hawkish, paving the way for a rate hike,' he said.

'The old Warsh would have raised rates early,' he added, referring to Warsh's long-standing reputation as a monetary hawk. 'Nobody knows which version of Warsh will take the stage.'

Despite headwinds from energy, geopolitics, and tariffs, the economy and stock market continue to heat up amid the AI investment boom, leading many to question why the Fed would even consider easing again.

Warsh's reassessment and adjustment may deviate from many expectations.