Singapore Interest Rate Analysis: Warsh's Debut Ahead, Dot Plot May Fade as Rate Hike Signals Emerge

The Fed's quarterly dot plot rate projections may soon lose their last rate cut signal, and the entire chart itself could be eliminated. Then the market will have to judge whether Kevin Warsh is truly the inflation hawk he has claimed to be.

The new Fed chair is busy staking out his position and listening to staff ahead of his first policy meeting later this month. Any guidance he provides on the policy path is unlikely to yield a simple answer.

The astonishing growth in artificial intelligence (AI) investment and the energy price surge from the three-month Iran war have pushed inflation well above target. Coupled with internal variables within the FOMC, futures markets are panicking, expecting the Fed's next rate hike could come before year-end.

In recent months, one of the few remaining arguments for the doves has been that the labor market (the other side of the Fed's dual mandate) could show cracks, potentially worsened by AI-related layoffs or energy-related corporate production cuts. But there is little sign of that so far.

Instead, there are indications the job market appears strong, perhaps even improving. April job openings surged, and May private sector payrolls rose by 122,000, beating expectations, all pointing in this direction. The national nonfarm payrolls report for May, due Friday, will test this trend.

The Fed will not raise rates this month but may sow the seeds for a rate hike.

Beyond any signals from Warsh at the press conference, markets will closely watch whether the Fed's previous statement hinting at another rate cut bias is removed. At the last rate meeting, three governors voted to remove that language, and since then, at least one recent dovish-leaning governor (Waller) has joined them.

But the quarterly updated economic projections from Fed policymakers, including the dot plot forecasting future rate paths, may become the focus.

The current median projection is for one more rate cut this year and another 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 rate cuts in 2027, or even hikes as the market expects, could have the greatest impact.

Figure: Changes in Fed dot plot projections

Of course, the irony is that Warsh's dislike of so-called forward guidance may well lead him to abolish the dot plot entirely. Doing so would win him support from many, including his predecessor Powell, who remains a Fed governor.

If the prospect of further easing is ruled out, forward guidance is stopped, and markets are left to judge based on new data, interest rate markets could become more strained and volatile in the second half of the year.

Of course, some investors still hope the end of the Iran war will put easing back on the table, or that the impact of energy tightening on real incomes will sufficiently dampen household demand to control other prices.

But many others believe the tide has turned.

Rate Cut Plans Abruptly Halted

Economist Tim Duy of SGH Macro argues that the inflationary consequences of higher energy prices now dominate the impact on economic growth, and with the Fed beginning to realize that the last rate cut in December was a mistake, the internal stance within the FOMC is rapidly shifting.

"Fed officials are aware of the increasing risk of improper monetary policy and are quickly turning hawkish to pave the way for rate hikes," he said.

"The old Warsh would have raised rates early," he added, referring to Warsh's long-standing reputation as a monetary hawk. "No one knows which version of Warsh will appear."

Despite headwinds from energy, geopolitics, and tariffs, with the AI investment boom heating up the economy and stock market, many question why the Fed would still consider easing again.

Warsh's rethinking and adjustments may deviate from what many expect.