Warsh Debut Preview: Fed Dot Plot May Fade, Rate Hike Signals Emerge
The Fed's quarterly "dot plot" rate projection may soon lose its last rate-cut signal, or the entire chart could be scrapped. Markets will then more directly judge whether Kevin Warsh is indeed the inflation hawk he has long seemed. If so, it might surprise some investors.
The new Fed chair is busy clarifying his stance and listening to staff ahead of his first policy meeting later this month. Markets will find no simple answer from any hint about policy direction.
The rapid growth of AI investment, coupled with energy price spikes from the three-month Iran war, have pushed inflation well above target. Combined with internal FOMC uncertainties, futures markets have turned nervous, expecting the Fed's next rate hike could come before year-end.
In recent months, one of the few remaining arguments for doves has been the possibility of labor market cracks, exacerbated by AI-related layoffs or energy-related production cuts. But there is little sign of that.
Instead, signs point to a still-strong job market, possibly improving. April job openings surged, and May private payrolls exceeded expectations with 122,000 new jobs. The May national nonfarm payrolls report due Friday will test this trend.
The Fed will not hike this month, but may plant seeds for a hike.
Beyond any signals from Warsh's press conference, markets will watch for whether the Fed removes the hint of another rate cut in its statement. At the last meeting, three board members voted to delete the language; since then, at least one previously dovish Fed governor (Waller) joined them.
But the quarterly economic projections, including the dot plot showing expected future rates, may become the focus.
The current median projection calls for one more rate cut this year and another in 2027.
Since March, various Fed officials' comments suggest the rate-cut expectation for this year will likely disappear from the dot plot. Whether the 2027 cut remains, or whether the market expects a rate hike, may have the biggest impact.
Chart: Fed Dot Plot Projection Changes
Ironically, Warsh's disdain for forward guidance may lead him to abolish the dot plot altogether. He would find many supporters, including his predecessor Jerome Powell, who remains a Fed governor.
If the prospect of further easing is excluded, guidance is stopped, and markets are left to judge based on incoming data, rate markets 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 onto the table, or that the impact of energy tightening on real income will be enough to curb household demand and thus control other prices.
But many believe the tide has turned.
Rate Cut Plans Halted
SGH Macro economist Tim Duy argues that the inflationary consequences of higher energy prices now dominate growth effects, and as the Fed begins to realize that December's last rate cut was a mistake, the FOMC stance is shifting rapidly.
"Fed officials are increasingly aware of the risk of inappropriate monetary policy and are quickly turning hawkish to pave the way for rate hikes," he said.
"The old Warsh would have hiked earlier," he added, referring to Warsh's long reputation as a monetary hawk. "No one knows which version of Warsh will show up."
Despite headwinds from energy, geopolitics, and tariffs, the economy and stock market continue to heat up with the AI investment boom, leaving many questioning why the Fed would consider easing again.
Warsh's rethink and adjustment may differ from many expectations.
