Walsh's Debut Lands: Dot Plot Remains, But the Fed 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. Unsurprisingly, the federal funds rate remained unchanged within the established range, in line with market expectations.

Over the past few weeks, market pricing had left little room for debate on 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, Warsh, would conduct his first policy communication — this was Warsh's first FOMC meeting as Chair, and the first opportunity for the market to observe how he will shape the monetary policy communication framework for the coming years.

The Dot Plot Remains, but Warsh Withholds His Own Projection

The most discussed market shift from this meeting came from the structure of the economic projections and the dot plot itself.

• Odaily Note: The so-called "Dot Plot" is the Fed's quarterly published interest rate projection tool. Each dot represents one 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 committee's overall assessment of the economic and inflation outlook, the dot plot has long been considered a crucial reference for the market to interpret the direction of Fed policy.

In the latest FOMC economic projections, only 18 of the 19 Fed officials submitted dot plot projections. Among them, one official believed that a cumulative 75 basis point rate hike should occur for the remainder of 2026, five believed in a cumulative 50 basis point hike, three believed in a cumulative 25 basis point hike, eight believed rates should remain unchanged, one believed in a cumulative 25 basis point cut, and one official was absent.

Warsh subsequently acknowledged during the press conference that it was he who did not submit an interest rate projection. Explaining his decision, Warsh stated: "I did not offer any projections of my own, consistent with my long-held views, at least as it is currently structured."

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 "effectiveness of the dot plot," "excessive forward guidance," and the "frequent release of policy signals." In Warsh's view, the Fed does not need to tell the market every future step it intends to take but should make decisions based on real-time economic data.

Although the market once speculated that Warsh might push for reforming the dot plot mechanism, or even abolishing it outright, the dot plot was not directly canceled following this meeting. However, Warsh's own absence sent a clear signal — the Fed is downplaying the guiding significance of the dot plot.

The Implicit Shift in the Fed's Communication Framework

During the press conference, Warsh also stated that the Fed will implement a series of reform measures in the future, including establishing multiple specialized working groups to explore more open data collection methods and study ways to improve the Fed's existing statistical indicator system.

In the subsequent Q&A session with reporters, when pressed repeatedly about the next step on rates or whether current rates are restrictive, Warsh repeatedly declined to provide clear guidance.

Over the past decade or so, one of the core capabilities of the Fed has been to continuously lower market uncertainty through the dot plot, the Summary of Economic Projections (SEP), and press conferences. The market's intense focus on the Fed's every move stems 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 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 judgment.' This will directly weaken the certainty function of forward guidance.

Rate Hike Expectations Rise, 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 started reassessing the upper bound of the Fed's policy reaction function. This involves considering whether, given inflation has not significantly fallen, a more aggressive tightening path exists than previously anticipated.

This change first manifested in short-duration assets.

Traders began repricing a higher terminal rate. Pricing in some interest rate futures contracts indicated that the market was already discussing the possibility of another rate hike as early as around October, while not ruling out tail risks of a more aggressive path. Probability data from Polymarket also moved higher, reflecting that the market is pricing in an 'opening window for a rate hike resumption.'

U.S. stocks saw a notable decline following the decision, with all three major indices closing lower. The S&P 500 (-1.2%) and the Nasdaq (-1.3%) both fell over 1%, with tech stocks leading the decline, signaling a clear cooling of market risk appetite.

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

• Short-end rates rise: The path for rate hikes is reopened.
• Risk asset pullback: Valuations become more sensitive to interest rates.
• Stronger U.S. dollar + yield curve volatility: Reflecting increased policy uncertainty.

Importantly, the market is not simply trading 'economic weakness' or the 'disappearance of rate cut expectations,' but is instead trading a more complex logic — under the new communication framework led by Warsh, the inflation constraint has been re-emphasized, and the 'upside tail risk' for the policy path is becoming more real.

In other words, if inflation does not fall quickly, will the Fed turn restrictive earlier and faster than the market originally expected?

Warsh's Shift May Be Just Beginning

In summary, if one looks only at the outcome of this meeting, the Fed has not undergone a drastic shift: rates are unchanged, the dot plot remains, and the system is still operating. However, if the focus shifts from the 'policy path' to the 'communication style,' changes are already evident.

Warsh's debut was more like a signal test. He didn't scrap old tools, but he didn't completely rely on them either. His choice was to 'weaken their effect and lower their weight.'

Looking at the longer-term implications, the biggest question left by this debut is not 'whether the Fed will raise rates next,' but 'how will the market repricing of the world occur when the Fed stops spoiling the market path ahead of time.'