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

Original: Odaily Planet Daily (@OdailyChina)

Author: Azuma (@azuma_eth)

In the early hours of June 18, Beijing time, the Federal Reserve officially announced its latest interest rate decision. As expected, the federal funds rate remained unchanged within its established range, aligning with market expectations.

Over the past few weeks, market pricing has shown little controversy over the rate path, and the market had already fully priced this in. Therefore, the true focus of this rate decision was not on "whether to cut rates," but on how the new Fed Chair, Warsh, would conduct his first policy communication — This was the first FOMC meeting chaired by Warsh, and the market's first opportunity to observe how he will shape the framework for monetary policy communication in the years to come.

The Dot Plot Remains, But Warsh Himself is Absent

The most discussed change from this meeting stems from the structure of the economic projections and the dot plot itself.

• Note from Odaily: The so-called "Dot Plot" is a quarterly released interest rate projection tool from the Fed. Each dot represents an FOMC member's expectation for the future federal funds rate. Although these projections are not formal policy commitments, because they reflect the committee's overall judgment on the economic and inflation outlook, the dot plot has long been considered a key reference for 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 hike rates by a cumulative 75 basis points for the remainder of 2026, 5 favored a cumulative 50 basis point hike, 3 favored a cumulative 25 basis point hike, 8 favored maintaining the current rate, 1 favored a cumulative 25 basis point cut, and 1 was absent.

Warsh later acknowledged during the press conference that he was the one who did not submit a rate projection. Explaining his decision, Warsh stated: "I did not offer any projections of my own. This is consistent with my long-held view, at least as its current structure is concerned."

In contrast to his predecessor Powell's highly transparent and frequent communication style, Warsh has long been a proponent of "saying less." He has repeatedly questioned "the efficacy of the dot plot," "excessive forward guidance," and "the frequent signaling of policy intentions." In Warsh's view, the Fed does not need to tell the market every future step it will take but should make decisions based on real-time economic data.

Although the market once speculated that Warsh might push for reform of the dot plot mechanism, or even abolish it entirely, the dot plot was not directly eliminated in this meeting. However, Warsh's own absence still sent a clear signal — the Fed is downplaying the guiding significance of the dot plot.

The Subtle Shift in the Fed's Communication Framework

During the press conference, Warsh also stated that the Fed would implement a series of reform measures in the future, including establishing multiple specialized working groups to explore more open data collection methods and study improvements to the 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 rate is restrictive, Warsh repeatedly refused to provide clear guidance.

For over a decade, one of the Fed's core competencies has been continuously lowering 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 provides a "predictable path."

But Warsh's statements are changing this logic. Clearly, Warsh emphasizes data dependence, making decisions on a meeting-by-meeting basis, and maintains a more restrained expression regarding the future path.

If this tendency continues, the market will face a structural change — The Fed will no longer try to "explain the future," but only describe its "current judgment." This will directly undermine the certainty function of forward guidance.

Rate Hike Expectations Heat Up, Market Risk Appetite Declines

Following the rate decision, the market quickly began repricing the policy path.

After Warsh emphasized that the "central bank will not tolerate high inflation," the market began reassessing the upper bound of the Fed's policy reaction function. The question is whether, given that inflation has not clearly declined, there is potential for more aggressive tightening than previously expected.

This change was first reflected in short-dated assets.

Traders began betting on a higher terminal rate. Pricing in some interest rate futures contracts suggests the market is already discussing a potential rate hike again as early as around October, without ruling out tail risks from a more aggressive path. Probability data from Polymarket has also risen in tandem, indicating that the market is pricing in an opening "window for a re-tightening."

U.S. stocks fell notably after the decision, with all three major indices closing lower. The S&P 500 (-1.2%) and the Nasdaq (-1.3%) both fell by over 1%, led by a decline in tech stocks, signaling a significant cooling of market risk appetite.

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

• Short-end rates moving up: The path for rate hikes has been reopened.
• Risk asset pullback: Increased sensitivity of valuations to interest rates.
• Stronger U.S. dollar + yield curve volatility: Reflecting increased policy uncertainty.

It's worth noting that the market is not simply trading on "economic weakening" or "disappearance of rate cut expectations," but on a more complex logic — Under Warsh's new communication framework, the inflation constraint has been re-elevated, and the "upside tail risk" of the policy path is becoming more real.

In other words, if inflation does not fall quickly, could the Fed pivot back to tightening sooner and faster than the market originally expected?

Warsh's Shift May Just Be Beginning

In summary, looking only at the outcome of this meeting, the Fed did not make an aggressive shift. Rates remained unchanged, the dot plot persists, and the system is still in operation. However, if the focus shifts from the "policy path" to the "communication style," changes are already underway.

Warsh's debut felt more like a signal test. He didn't abolish old tools, but he didn't fully rely on them either. Instead, he chose to "weaken their effect and reduce their weight."

Looking at the longer-term implications, the biggest question left by this debut is not "whether the Fed will hike rates next," but "how will the market re-price the world when the Fed stops previewing its policy path?"