New Fed Chair Warsh's Debut: Dot Plot May Fade, Rate-Cut Signals Weaken

The Federal Reserve's quarterly “dot plot” interest rate projections may soon lose its last rate-cut signal, the so-called “dovish dot,” or even the entire chart itself might be scrapped. Markets will then have to judge whether Kevin Warsh is truly the inflation hawk he claims to be.

The new Fed chair is busy staking his position and hearing from staff ahead of his first policy meeting later this month. Any guidance from his policy direction will be hard to distill into a simple answer.

The stunning growth in artificial intelligence (AI) investment, along with energy price spikes from three months of war in Iran, has pushed inflation well above target. Combined with shifts within the FOMC, futures markets are turning jittery, 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 that the labor market — the other side of the Fed's dual mandate — might show cracks, possibly worsened by AI-related layoffs or energy-linked production cuts. But there is little evidence of that yet.

Instead, signs point to a strong and possibly improving job market. A big jump in April job openings and May's private-sector payroll gain of 122,000, above expectations, both point that way. May's national nonfarm payrolls report, due Friday, will test the trend.

The Fed won't hike this month, but it may plant the seeds for a hike.

Beyond any signals from Warsh at his press conference, markets will closely watch whether the Fed removes from its statement the hint of another rate cut. At the last rate meeting, three governors already voted to remove that language, and since then at least one previously dove-leaning governor (Waller) has joined them.

But the Fed policymakers' quarterly economic projections, including the “dot plot” forecasting rates for coming years, could become the focus.

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

Since March, various comments from Fed officials suggest the expectation of a rate cut this year may vanish from the dot plot. Whether 2027 will see a cut, or even a hike as markets expect, might be the biggest shock.

Of course, the irony is that Warsh's distaste for so-called forward guidance may well prompt him to scrap the “dot plot” altogether. He would have plenty of support—including from his predecessor Jerome Powell, who remains a Fed governor.

If the prospect of further easing is ruled out, guidance stopped, and markets left to judge on incoming data, the interest rate market could become more tense and volatile in the second half.

Of course, some investors still hold out hope that an end to the Iran war could bring easing back on the table, or that the hit to real incomes from energy tightening will be enough to curb household demand and thus contain other prices.

But many see the tide as having turned.

Rate-Cut Plans Halt Abruptly

Tim Duy, economist at SGH Macro, argues the inflationary consequences of higher energy prices now dominate the growth outlook, and with the Fed beginning to realize December's last rate cut was a mistake, the stance within the FOMC is shifting rapidly.

“Fed officials see a rising risk of inappropriate monetary policy, and are quickly turning hawkish to pave the way for 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 keep heating up amid an AI investment frenzy, making many question why the Fed would even consider easing again.

Warsh's rethink and recalibration may diverge from many expectations.