Warsh debut preview: dot plot may fade, signs of a hike emerge
The Fed's quarterly dot plot of rate forecasts may soon lose its last cut signal, the so-called easing dot, and the chart itself could even be scrapped. If that happens, markets will have to judge whether Warsh really is the inflation hawk he has claimed to be. If he is, some investors may be surprised.
The new Fed chair is busy setting out his stance and hearing staff briefings ahead of his first policy meeting later this month. Any guidance he draws from the policy outlook is unlikely to give a simple answer.
The explosive growth in AI investment and the energy-price spike triggered by the three-month Iran war have pushed inflation well above target. Add in the uncertainty inside the FOMC, and futures markets are panicking, expecting the Fed's next hike could come before year-end.
One of the few remaining arguments from the doves in recent months has been that the labor market, the other side of the Fed's dual mandate, may be cracking, with AI-related layoffs or energy-related production cuts potentially worsening the situation. But there is almost no sign of that now.
Instead, there are signs the jobs market still looks strong, and may even be improving. A big jump in April job openings and May private payroll gains of 122,000, which beat expectations, both point to that. The national nonfarm payrolls report for May will be released on Friday and will test that trend.
The Fed will not hike this month, but it may plant the seeds for one.
Beyond any signals Warsh gives at the press conference, markets will watch closely for whether hints in the Fed's previous statement about a renewed easing bias are removed. At the last rate meeting, three governors voted to delete that wording, and since then at least one recently dovish governor, Waller, has joined them.
But the Fed's quarterly update of economic projections, including the dot plot that maps rate expectations for the coming years, may become the focal point.
Right now, the median forecast is for one more cut this year and another in 2027.
Since March, Fed officials' remarks suggest the 2026 cut expectation is likely to disappear from the dot plot. Whether 2027 will see cuts, or even a hike as the market expects, may be what shocks markets most.
Chart: Changes in the Fed dot plot forecasts
Ironically, Warsh's dislike of so-called forward guidance will likely push him to abolish the dot plot altogether. He would get plenty of support for doing so, including from his predecessor Powell, who still serves as a Fed governor.
Cutting off the prospect of further easing and stopping guidance, leaving markets to sort things out from new data on their own, could make the rate market more tense and volatile in the second half of the year.
Of course, some investors still hope the end of the Iran war will eventually bring easing back onto the table, or that the squeeze from energy prices will hit real incomes enough to curb household demand and cool other prices.
But many others believe the picture has already turned.
Rate-cut plans come to a halt
SGH Macro economist Tim Duy believes the inflation hit from higher energy prices now outweighs the growth impact, and that the FOMC's stance is shifting quickly as the Fed starts to realize December's last rate cut was a mistake.
“Fed officials increasingly recognize the risk of inappropriate monetary policy, and they are quickly turning hawkish to pave the way for hikes,” he said.
“The earlier version of Warsh would have hiked sooner,” he added, referring to Warsh's long-standing 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 keep heating up as the AI investment boom gains momentum, leading many to question why the Fed should even think about easing again.
Warsh's rethink and recalibration may end up differing from many people's expectations.
