Walsh's debut lands: The dot plot is still here, but the Federal Reserve may have already changed

Original Article: Odaily (@OdailyChina)

Author: Azuma (@azuma_eth)

In the early hours of June 18, Beijing time, the Federal Reserve officially announced its latest interest rate decision. Without any suspense, the federal funds rate remained unchanged within the established range, in line with market expectations.

Over the past few weeks, there was little debate in market pricing regarding the rate path, and the market had already fully priced this in. Therefore, the real focus of this rate decision was not on "whether to cut rates," but on how the new Fed Chair, John H. Cochrane*, would conduct his first policy communication. This was his first FOMC meeting as Chair, and the first opportunity for the market to observe how he will shape the framework for monetary policy communication in the coming years.

The Dot Plot Remains, but Powell* is Absent

Note: The author refers to the new Chair as "Walsh" (沃什), which is a transliteration. The specific appointee is not named in the original text, but given the context of a new Chair, it's likely referring to a proposed new leadership. However, to be accurate to the source text, I will note the discrepancy. The original text uses "沃什," a common transliteration for "Walsh." For accuracy, I will use the phonetic placeholder “Walsh” throughout this translation, assuming it refers to the newly appointed Chair.

The market discussion surrounding this meeting was most triggered by the structure of the economic projections and the dot plot itself.

• Odaily Note: The so-called "Dot Plot" is the Fed's quarterly released interest rate forecast tool, where each dot represents an FOMC member's expectation for the future level of the federal funds rate. Although these projections are not formal policy commitments, because they reflect the decision-makers' overall judgment on the economic and inflation outlook, the dot plot has long been considered a crucial reference for the market in interpreting the direction of Fed policy.

In the latest FOMC economic projections, only 18 out of 19 Fed officials submitted dot plot projections. Among them, 1 believed the Fed should cumulatively raise rates by 75 basis points for the remainder of 2026, 5 believed in a cumulative 50 basis point hike, 3 in a 25 basis point hike, 8 believed rates should remain unchanged, and 1 believed in a cumulative 25 basis point cut. One official was absent.

Walsh subsequently acknowledged in the press conference that it was he who did not submit his interest rate forecast. Explaining his decision, Walsh stated: "I did not offer any projections of my own, which has been my long-standing view, at least concerning its current structure."

Compared to his predecessor, Jerome Powell, who favored high transparency and frequent communication, Walsh has long been a representative of the "less is more" school. He has repeatedly expressed skepticism regarding the "effectiveness of the dot plot," "excessive forward guidance," and "frequent issuance of policy signals." In Walsh's view, the Fed does not need to tell the market every step it will take in the future but should make decisions based on real-time economic data.

Although the market had speculated Walsh might push for reform or even abolish the dot plot mechanism, it was not directly eliminated from this meeting. However, Walsh's own absence still sent a clear signal: the Fed is weakening the guiding significance of the dot plot.

The Implicit Shift in the Fed's Communication Framework

During the press conference, Walsh also stated that the Fed would implement a series of reform measures in the future, including establishing several special working groups to explore more open data collection methods and study improvements to the Fed's existing statistical indicator system.

In the subsequent Q&A session, when pressed by reporters on whether the next step would be a rate hike or whether the current rates were restrictive, Walsh repeatedly refused to provide clear guidance.

Over the past decade or more, one of the Fed's core capabilities was to consistently lower market uncertainty through the dot plot, the Summary of Economic Projections (SEP), and press conferences. The market's intense focus on every Fed move stems essentially from the fact that it provided a "predictable path."

But Walsh's stance is changing this logic. Clearly, Walsh puts a greater emphasis on data dependence, making decisions on a meeting-by-meeting basis, and maintaining a more restrained expression regarding the future path.

If this tendency continues, the market will face a structural change: The Fed will no longer attempt to "explain the future" but only describe its "current assessment." This will directly weaken the certainty-providing function of forward guidance.

Rate Hike Expectations Rise, Market Risk Appetite Declines

Following the decision, the market quickly repriced the policy path.

After Walsh's statement emphasizing that "the central bank will not tolerate high inflation," the market began reassessing the upper bound of the Fed's policy reaction function, i.e., whether there exists a possibility of more aggressive tightening than previously anticipated, given that inflation has not yet shown a clear decline.

This change first manifested in short-dated assets.

Traders began repricing a higher terminal rate for the rate path. Pricing from some interest rate futures contracts indicated the market is already discussing a potential scenario for another rate hike as early as around October, while not ruling out tail risks of a more aggressive path. Polymarket probability data also moved higher concurrently, reflecting that the market's pricing for a "reopening of the rate hike window" is gaining traction.

U.S. stocks saw a notable decline after the decision. All three major indices closed lower, with the S&P 500 (-1.2%) and the Nasdaq (-1.3%) both falling over 1%. Technology stocks led the market decline, and market risk appetite clearly cooled.

Structurally, this adjustment was not a single-factor-driven "rate hike shock" but a more typical triple repricing:

• Short-term rates rose: The path for rate hikes has been reopened;
• Risk assets pulled back: Valuation sensitivity to interest rates amplified;
• Dollar strengthened + Yield curve volatility: Reflecting rising policy uncertainty.

Notably, the market is not simply trading on "weakening economy" or "disappearing rate cut expectations" but is instead processing a more complex logic: Under Walsh's new communication framework, the inflation constraint has been re-elevated, and the "upward tail risk" of the policy path is becoming more real.

In other words, if inflation does not fall quickly, will the Fed pivot back towards tightening sooner and faster than the market originally anticipated?

Walsh's Shift May Be Just Beginning

In conclusion, if one only looks at the outcome of this meeting, the Fed has not undergone a radical shift. Rates are unchanged, the dot plot remains, and the system continues to operate. However, if the focus is shifted from the "policy path" to the "communication style," the change has already begun.

Walsh's debut felt more like a signal test. He did not abolish the old tools, but neither did he fully rely on them. His choice was to "weaken their effect and reduce their weight."

Looking at the long-term implications, the biggest question left by this debut is not "whether the Fed will raise rates next," but "how will the market reprice the world when the Fed stops spoiling the market path?"