Fed Dot Plot May Fade: Warsh Debut Hints at Rate Hike?

## Changes Ahead for Fed Dot Plot, Focus on Warsh Debut The `dot plot` rate projections released quarterly by the Fed may soon lose their last rate-cut signal, the so-called "dovish dot," or even the entire chart itself could be eliminated. Then, markets will have to judge whether Warsh is truly the inflation hawk he has claimed to be. If so, it might surprise some investors. The new Fed chair is busy taking positions and listening to staff ahead of his first policy meeting later this month. Any guidance he provides on the policy path will be hard to distill into a simple answer. Stunning growth in AI investment and a three-month-long Iran war driving up energy prices have pushed inflation well above target. Combined with uncertainties inside the FOMC, futures markets are jittery, pricing in the possibility of the next rate hike before year-end. ## Labor Market Shows No Clear Cracks Yet In recent months, one of the few arguments left for doves has been that the labor market (the other side of the Fed's dual mandate) might show cracks, exacerbated by AI-related layoffs or energy-related production cuts. But there is almost no sign of that yet. Instead, the labor market appears strong and may even be improving. April job openings surged, and May private sector payrolls added 122,000 jobs, beating expectations. The May national employment report due Friday will test this trend. The Fed won't hike this month, but may plant seeds for a hike. Beyond any signals from Warsh at the press conference, markets will also watch closely whether the previous statement's hint of another rate cut is removed. At the last rate meeting, three governors voted to remove that language, and since then, at least one recently dovish governor (Waller) has joined them. ## Dot Plot in Focus; Rate Cut Expectations May Disappear But the quarterly updated economic projections from Fed policymakers, including the `dot plot` projecting future rate paths, could become the focus. The current median projection is for one more rate cut this year and another cut in 2027. Comments from Fed officials since March suggest that the rate cut expectation for this year is likely to disappear from the dot plot. Whether there will be a rate cut in 2027, or even a rate hike as markets expect, might have the biggest impact. Figure: Fed dot plot projection changes Of course, the irony is that Warsh's distaste for so-called forward guidance likely pushes him to abolish the "dot plot" entirely. He would have backing from many — including his predecessor Powell, who remains a Fed governor. If the outlook for further easing is excluded, guidance is halted, and markets are left to judge based on incoming data, interest rate markets may become more tense and volatile in the second half of the year. Of course, some investors still hope that an eventual end to the Iran war will put easing back on the table, or that the real income impact of the energy squeeze will be enough to dampen household demand and thus other prices. But many believe the tide has turned. ## Rate Cut Plans Abruptly Halted? Hawkish Shift Accelerates SGH Macro economist Tim Duy believes the inflation consequences of higher energy prices now dominate the economic growth impact, and as the Fed begins to realize that December's last rate cut was a mistake, the stance inside the FOMC is shifting rapidly. "Fed officials are aware of the growing risk of inappropriate monetary policy and are quickly turning hawkish, paving the way for a rate hike," he said. "The old Warsh would have hiked rates earlier," he added, referring to Warsh's long-standing 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 amid the AI investment boom, leading many to question why the Fed would consider easing again. Warsh's rethinking and adjustments may diverge from many expectations. Editor: Liu Mingliang