The Federal Reserve’s quarterly “dot plot” rate forecasts may soon lose their last projected rate cut, the so-called easing dot, and the plot itself could possibly disappear altogether. Then markets would have to work out whether Kevin Warsh is really the inflation hawk he once purported to be. If he is, that might yet prove a shock for some investors.
The new Fed chair is busily setting out his stall and dutifully consulting staff before his first policy meeting later this month. None of the guidance he gets on policy direction will offer easy answers.
An eye-popping AI investment boomand red-hot energy price pressures from the three-month war in Iran have pushed inflation far above target. Together with shifting sands within the Fed’s policymaking council, that has spooked futures markets into pricing the Fed’s next interest rate move as up, possibly by year-end.
Also Read: US Fed says Iran war driving ‘moderate-to-strong’ inflation
One of the few arguments left for the doves in recent months has been that cracks may appear in the labor market – the other side of the Fed’s dual mandate – and potentially be exaggerated by AI-related job shedding or energy-related corporate cutbacks. There’s very little sign of that yet.
If anything, the labor market looks robust, possibly even strengthening. April’s sharp jump in job openings and May’s above-forecast 122,000 private-sector job gains point that way, if taken at face value. May’s national employment report is due on Friday and will put that picture to the test.
The Fed’s not going to raise rates this month, but it may start to sow the seeds.
Aside from any signal Warsh sends at his press conference, markets will focus hard on any removal of language in prior Fed statements indicating a bias to ease again. Three policymakers already voted to remove it last time out, and at least one recently dovish board member, Christopher Waller, has joined them since.
But Fed policymakers’ quarterly update of economic projections, including the “dot plot”showing where they see interest rates in coming years, may steal the show.
The existing median of views is for another cut this year and one more in 2027.
Soundings from Fed officials since March suggest this year’s projected cut is likely to disappear from the plot. Whether 2027 goes with it, or even chimes with market pricing for a hike, may pack the biggest market punch.
The irony, of course, is that Warsh’s distaste for so-called forward guidance may well see him try to scrap the ‘dot plot’ entirely. He would have plenty of support for that – including from his predecessor, Jerome Powell, who remains on the board.
Wiping further easing from the horizon, then turning out the lights and leaving markets to make up their own minds from incoming data, could make for an edgier and more volatile interest rate market through the second half of the yea
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