Warsh Debut Ahead: Dot Plot May Fade, FOMC Signals Rate Hike
The Fed's quarterly "dot plot" rate forecasts may soon see the last rate cut signal disappear, known as the "dovish dot," or the chart itself could be scrapped. Then, the market will have to judge whether Warsh is indeed the inflation hawk he has claimed to be. If so, it might surprise some investors.
The new Fed chair is busy establishing his position and listening to staff ahead of his first policy meeting later this month. Any guidance he gleans from policy direction will not yield a simple answer.
Stunning growth in AI investment and surging energy prices from the three-month war with Iran have pushed inflation well above target. Adding uncertainty within the FOMC, futures markets are pricing in the possibility of the next Fed rate hike before year-end.
In recent months, one of the few remaining arguments for doves was that the labor market—the other side of the Fed's dual mandate—could show cracks, potentially worsened by AI-related layoffs or energy-related production cuts. But there is little sign of that.
Instead, the labor market appears strong and possibly improving. A sharp increase in job openings in April and better-than-expected private sector payrolls in May of 122,000 point in that direction. The May national nonfarm payrolls report due Friday will test this trend.
The Fed won't hike this month, but it may plant the seeds for a hike.
Apart from any signals from Warsh in the press conference, the market will watch closely whether the Fed's previous statement hinting at another rate cut is removed. At the last meeting, three governors voted to remove that language, and since then, at least one recently dovish governor (Waller) has joined them.
But the Fed policymakers' quarterly updates of economic projections, including the dot plot of rate forecasts over the next few years, may become the focus.
The current median forecast is one more rate cut this year and another in 2027.
Statements from Fed officials since March suggest the rate cut expectation this year is likely to disappear from the dot plot. Whether 2027 will see a cut or even a hike as the market expects may be the biggest shock.
Image: Changes in Fed dot plot forecasts
Of course, ironically, Warsh's dislike of so-called forward guidance likely pushes him to abolish the dot plot entirely. He would have many supporters in doing so—including his predecessor Powell, who is still a Fed governor.
If the prospect of further easing is excluded and guidance ceases, allowing the market to make its own decisions based on newly released data, the interest rate market could become more tense and volatile in the second half of the year.
Some investors still hope the eventual end of the Iran war will put easing back on the table, or that the impact of energy tightening on real incomes will be enough to dampen household demand and control other prices.
But many believe the tide has turned.
Rate Cut Plans Halted
SGH Macro economist Tim Duy said the inflationary consequences of energy price rises now dominate the impact on growth, and as the Fed begins to realize the last rate cut in December was a mistake, the stance within the FOMC is rapidly shifting.
"Fed officials realize the risk of inappropriate monetary policy is increasing, and they are quickly turning hawkish, paving the way for rate hikes," he said.
"The old Warsh would have hiked early," he added, referring to Warsh's long-standing reputation as a monetary hawk. "No one 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 thanks to the AI investment boom, leading many to question why the Fed would even consider easing again.
Warsh's rethinking and adjustments may differ from what many expect.
