Warsh's Debut Preview: Dot Plot May Fade, Rate Hike Signals Emerge
The Fed's quarterly "dot plot" interest rate projections may soon lose their last rate-cut signal, or the entire chart itself could be eliminated. Markets will then have to gauge whether new Fed Chair Kevin Warsh is truly the inflation hawk he has previously indicated.
Warsh is busy defining his stance and listening to staff ahead of his first policy meeting later this month. Any guidance he gives on the policy path will be hard to distill into a simple answer.
The stunning growth in AI investment, combined with the energy price spike from the three-month Iran war, has pushed inflation well above target. Coupled with the variability within the FOMC itself, futures market sentiment has tightened, expecting the Fed's next rate hike may come before year-end.
In recent months, one of the few remaining arguments for doves has been that the labor market (the other side of the Fed's dual mandate) could crack, potentially exacerbated by AI-related layoffs or energy-related corporate cutbacks. But there is almost no sign of that yet.
Instead, evidence points to a strong—and possibly even improving—job market. April job openings surged, and May private sector payrolls added 122,000, beating expectations, both pointing in that direction. The national nonfarm payrolls report for May will be released Friday, offering a test of this trend.
The Fed won't raise rates this month, but could plant the seeds for a hike.
Beyond any signals from Warsh at the press conference, markets will also closely watch whether the Fed removes its previous hint of an easing bias in its statement. At the last rate meeting, three governors already voted to remove that language, and since then, at least one recent dovish Fed governor (Waller) has joined their ranks.
But the Fed policymakers' quarterly updated economic projections, including the "dot plot" forecasting future interest rate paths, may become the focus.
The current median projection is for one more rate cut this year, and another cut in 2027.
Since March, various statements from Fed officials suggest that the expectation of a rate cut 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 have the biggest impact on markets.
Of course, ironically, Warsh's aversion to so-called forward guidance may prompt him to abolish the "dot plot" entirely. He would have many supporters for doing so, including his predecessor Jerome Powell, who remains a Fed governor.
If the prospect of further easing is eliminated and guidance is removed, leaving markets to judge based on new data alone, then the interest rate market in the second half could be more tense and volatile.
Of course, some investors still hope that an end to the Iran war will bring easing back onto the table, or that the impact of energy tightening on real incomes will sufficiently dampen household demand to control other prices.
But many believe the tide has turned.
Rate Cut Plans Halted
Tim Duy, economist at SGH Macro, believes the inflation consequences of rising energy prices now dominate the impact on economic growth, and as the Fed begins to realize that the December rate cut was a mistake, the stance within the FOMC is shifting rapidly.
"Fed officials recognize the increasing risk of inappropriate monetary policy, and they are quickly turning hawkish to pave the way for rate hikes," 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 show up."
Despite headwinds from energy, geopolitics, and tariffs, the economy and stock market continue to heat up amid the AI investment boom, prompting many to question why the Fed would consider any further easing.
Warsh's rethinking and adjustments may deviate from many expectations.
