Warsh Debut: Dot Plot May Fade, Rate Hike Signals Emerge

The Federal Reserve's quarterly “dot plot” interest rate forecasts may soon lose their last rate cut signal, or even the entire chart could be scrapped. Then, markets will have to judge whether Kevin Warsh is truly the inflation hawk he claims to be.

The new Fed chair is busy setting his stance and gathering staff input before his first policy meeting later this month. Any guidance from policy direction is unlikely to yield a simple answer.

Artificial intelligence (AI) investment’s surprising growth, combined with a prolonged Iran war driving energy prices higher, has pushed inflation well above target. Adding to the uncertainty within the FOMC, futures market sentiment has tightened, with expectations that the Fed’s next rate hike could come before year-end.

In recent months, one remaining dovish argument has been that the labor market—the other half of the Fed’s dual mandate—could show cracks, possibly worsened by AI-related layoffs or energy–related production cuts. But there is little evidence of this so far.

Instead, signs point to a strong and even improving job market. April job openings surged, and May private sector payrolls grew by 122,000, beating expectations. The national nonfarm payrolls report for May, due Friday, will test this trend.

The Fed will not raise rates this month, but may plant seeds for a future hike.

Beyond any signals from Warsh at the press conference, markets will watch closely whether the Fed’s statement removes the previous hint of another rate cut. At the last meeting, three governors voted to delete that language, and at least one recently dovish governor (Waller) has since joined them.

But the Fed policymakers’ quarterly economic projections, including the “dot plot” forecasting interest rates over the next few years, may become the focal point.

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

Since March, Fed officials’ various statements suggest this year’s rate cut expectation will likely disappear from the dot plot. Whether 2027 brings a cut—or, as markets now anticipate, a hike—may be the biggest shock.

Chart: Changes in the Fed’s dot plot projections

Of course, the irony is that Warsh’s distaste for so-called forward guidance may lead him to abolish the dot plot entirely. He would have many supporters, including his predecessor Powell, who still serves as a Fed governor.

If the prospect of further easing is removed and guidance ceases, leaving markets to judge from new data, the second half of the year could see tighter and more volatile rate markets.

Of course, some investors still hope the Iran war will eventually end, reviving easing, or that the energy crunch’s impact on real income will be enough to suppress household demand and thus contain other prices.

But many see the tide as having turned.

Rate Cut Plans Abruptly Halted

SGH Macro economist Tim Duy believes the inflationary consequences of rising energy prices now dominate the growth impact, and as the Fed realizes December’s last rate cut was a mistake, the FOMC’s stance is rapidly shifting.

“Fed officials see an increasing risk of inappropriate monetary policy and are quickly turning hawkish to pave the way for rate hikes,” he said.

“The old Warsh would have raised rates earlier,” he added, referencing Warsh’s long 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 amid the AI investment boom, leading many to question why the Fed would still consider further easing.

Warsh’s rethinking and adjustment may deviate from many expectations.