With the Federal Reserve's upcoming interest rate decision approaching, and dovish policymakers successively shifting stance, the lingering expectation of 'one rate cut this year' in the dot plot is facing systematic elimination. An increasing number of institutions believe that under Kevin Warsh’s influence, forward guidance toward monetary easing may be entirely withdrawn.
Mike Dolan, a Reuters columnist, wrote that the Federal Reserve's quarterly interest rate projections—commonly known as the dot plot—are undergoing a pivotal shift. The last remaining dot signaling a single rate cut is highly likely to be removed, and there is even a possibility that this forward guidance tool could be abolished altogether. Going forward, markets will have to rely solely on incoming economic data to assess whether new Chair Kevin Warsh will uphold his well-known hawkish stance. Should he implement a firmly contractionary policy approach, the investment theses underpinning many existing portfolios would face significant disruption.
With the upcoming FOMC meeting drawing closer, Warsh is intensively engaging with internal research teams to gather input for policy deliberations, but the current complex macroeconomic environment makes it difficult to arrive at clear policy conclusions.
The AI sector is experiencing an unprecedented investment boom, while a three-month-long geopolitical conflict involving Iran has pushed energy prices higher. Together, these two factors have reignited significant inflationary pressures, reshaping market pricing dynamics. Interest rate futures are already pricing in a Fed rate hike before year-end.
Previously, the core argument supporting dovish Fed officials’ insistence on rate cuts centered on potential downside risks in the labor market—specifically, the employment mandate within the Fed’s dual mandate. Markets had feared that AI-driven job displacement and rising energy costs forcing corporate layoffs would weaken employment data. However, such downside signals have yet to materialize.
Current data indicate that labor market fundamentals remain robust—and are even strengthening. April’s job openings surged significantly, and May saw private-sector payrolls increase by 122,000, exceeding market expectations. This Friday’s national nonfarm payroll report will provide further validation of labor market strength. Market participants widely expect the Fed not to raise rates at this month’s meeting, but anticipate that the policy statement will lay the groundwork for future tightening.
In addition to Warsh’s post-meeting press conference remarks, markets will closely watch whether the FOMC statement removes language that previously left room for monetary easing. At the last meeting, three committee members already proposed eliminating such dovish forward guidance, and Christopher Waller—previously seen as leaning dovish—has recently shifted his stance and joined this camp. Updated economic projections and the dot plot released by committee members will be the key focus of this meeting.
The current median dot still indicates one rate cut this year and another in 2027. However, Dolan notes that based on statements from numerous Fed officials since March, the expectation for a rate cut this year is almost certainly being erased. Whether the 2027 rate cut dot remains—or shifts toward a hike—will directly roil global asset prices.
Interestingly, Warsh himself has long been critical of the forward guidance framework and intends to abolish the dot plot entirely. Jerome Powell, who remains on the Federal Reserve Board, has also expressed support for this move.
As expectations for monetary easing evaporate and the Fed potentially ceases providing advance signals of its policy direction, volatility in U.S. Treasury and interest rate markets is likely to rise significantly in the second half of the year. Some investors still hope that a resolution to the Iran conflict could ease price pressures, or that high oil prices might erode real household incomes and dampen consumption, thereby curbing inflation. However, an increasing number of institutions now believe the Fed’s policy cycle has fully turned.
With institutions collectively turning hawkish, is the Fed’s rate-cutting cycle coming to an end?
Tim Duy, an economist at SGH Macro Research Institute, analyzed that the current inflationary shock driven by rising energy prices has now outweighed its economic drag effect. Views within the Federal Reserve are rapidly diverging, with many committee members beginning to reconsider December’s rate cut as a policy misstep, leading the overall stance to collectively shift toward hawkishness. He stated:
“Fed officials have repeatedly delivered hawkish remarks, indicating that monetary policy is lagging behind economic fundamentals and is laying the groundwork for future rate hikes. Kevin Warsh has long advocated for early rate hikes; however, he previously moderated his rhetoric to align with the then-president’s preference for easing in pursuit of appointment. Now, no one can confidently predict his actual policy orientation.”
Key personnel changes have also recently occurred at the Fed. Kevin Warsh has newly appointed Paul Winfree as one of his transition advisors. Winfree previously served as Director of the White House Office of Management and Budget and as an economist at the Heritage Foundation. In 2023, he authored sections on Federal Reserve reform in a conservative policy platform, proposing the elimination of the Fed’s employment mandate so that the central bank would focus solely on inflation control—a proposal that would require congressional approval to become law.
Dolan noted that influenced by this advisor’s views, Warsh’s policy approach is likely less dovish than markets previously anticipated. Trump has also stated that he respects Warsh’s independence in setting monetary policy.
Despite multiple headwinds from energy prices, geopolitical tensions, and tariffs, surging AI-related capital expenditures continue to propel U.S. equities higher. Goldman Sachs’ Financial Conditions Index has reached its most accommodative level in four years, while Citi’s Economic Surprise Index remains firmly at a three-year high. Markets widely question the necessity of further Fed easing. Although credit conditions have tightened marginally in recent weeks, overall liquidity remains ample.
Jason Thomas, strategist at Carlyle Group, reflecting on the 1990s internet bubble cycle, remarked: “Rate cuts implemented during periods of rapid capital expenditure expansion deliver far greater economic stimulus than in ordinary environments. Today’s AI-related capital investment scale significantly exceeds that of the internet era, and real short-term interest rates are currently 300 basis points lower than they were back then. It is time for the Fed to abandon its entrenched dovish mindset.”
Dolan concluded that these developments suggest Warsh’s eventual policy adjustments could shatter the market’s prior expectations of continued monetary easing.