The FOMC discussion direction has completely reversed, shifting from "when to cut interest rates" to "whether to restart rate hikes." The market has fully priced in this meeting maintaining the interest rate unchanged and has turned its focus to three core themes: the variability of the dot plot, the controversy over policy independence, and the comprehensive reform of the communication system.

Source: Jinshi Data

The Federal Reserve will announce its latest interest rate decision at 2:00 AM Beijing time on Thursday. Half an hour later, newly appointed Chair Kevin Warsh will hold his first press conference since taking office, and the market has fully priced in that the benchmark interest rate will remain unchanged in this meeting.

The market focus is not simply on interest rate adjustments but on three core themes: the variability of the dot plot and the interest rate path for the year, the controversy over the Fed's policy independence, and the comprehensive reform of the central bank's communication system promoted by Warsh. Analysts from various institutions have distinctly differing opinions.

Significant changes in the dot plot, leading to polarized expectations for the annual interest rate path

The market expects that the upcoming quarterly Summary of Economic Projections (SEP) dot plot will show a clear hawkish shift, making a stark contrast with the March meeting three months ago.

In March, the vast majority of Fed officials predicted rate cuts within the year. However, this time, most policymakers are expected to believe that interest rates will remain unchanged throughout the year, with a few members possibly marking rate hikes in the dot plot to guard against inflation solidifying at high levels.

The continued changes in employment and inflation data have completely reversed the committee's discussion direction. Previously, the FOMC debated when to cut interest rates, but now the topic has shifted to whether there is a need to restart rate hikes.

This dot plot will also update economic expectations. Michael Feroli, Chief U.S. Economist at JPMorgan, expects Fed officials to lower the year-end unemployment rate forecast to 4.3%, consistent with the actual unemployment rate over the past three months; meanwhile, he expects core PCE inflation expectations to be raised to 2.9%, and some economists even forecast that this index will exceed 3%, providing a fundamental support for hawkish expectations.

Major institutions have sharply divided views on the annual interest rate path. PGIM economists believe that three rate hikes are needed within the year to suppress inflation. In stark contrast, Citigroup, relying on the U.S.-Iran ceasefire and falling oil prices, predicts a weakening labor market and expects the Fed to cut rates three times over the year.

Evercore ISI analyst Krishna Guha points out that Warsh must find a delicate balance; being too hawkish will raise rate hike expectations and suppress the stock market, while being too dovish will raise long-term yields and the breakeven point, which is also unfavorable for risk assets.

Unknown factors: Will Warsh submit personal interest rate predictions?

The biggest suspense of this SEP is whether Warsh himself will fill out and submit his personal interest rate expectations, with the market having four different predictions.

Richard Moody, Chief Economist at a regional bank, and TD Securities analysts forecast that Warsh will forgo submitting an interest rate prediction, expressing a rejection of this guidance tool and weakening the hawkish signal inherent in the dot plot.

Feroli believes Warsh must submit his prediction; deliberately absenting himself will be seen as publicly opposing the committee.

Some analysts predict that Warsh will participate in submitting, but after the meeting, he will initiate a comprehensive review of the entire central bank communication mechanism, with a long-term possibility of abolishing the dot plot established in 2012.

Another possibility is that Warsh, having only been in office for three weeks, may postpone submitting predictions under the pretext of not being fully familiar with his duties.

An absence in the dot plot also carries a layer of political risk: Stephen Miran, a former board member appointed by Trump, was previously one of the members predicting the lowest rates in the dot plot, and he has now left office. If the points submitted by Warsh fail to fill this easing expectation gap, the market will immediately determine that his policy stance is much more hawkish than Trump anticipated.

Doubts about the Fed's independence

At the beginning of the year, the market collectively bet on rate cuts, but in recent weeks, inflation and energy prices rebounding have rapidly increased rate hike expectations, completely diverging from the Trump administration's call for rate cuts.

Kevin Grady, President of Phoenix Futures Options, stated that Warsh’s policy framework will continue the data-driven logic of his predecessor Powell and will not change judgments due to White House requests.

However, Darin Newsom, a senior market analyst at Barchart.com, holds an entirely opposite view, stating that the Fed's credibility has completely collapsed after Powell's departure. Trump has publicly expressed his approval of rising inflation, signaling clear intervention. Currently, federal funds rate futures have pushed back rate hike expectations to December, and there will be no policy tightening before the November midterm elections.

Newsom believes that Warsh's core task upon taking office is to execute White House directives. Even if there are dissenting votes within the FOMC, Trump has positioned a large number of officials with aligned interests on the committee. Any emphasis on central bank independence by Warsh during the press conference will be meaningless rhetoric that global investors no longer trust, which is also a core reason why central banks around the world are continuously increasing gold holdings.

He said that Trump cares more about the timing of policy adjustments than the actions themselves. Since concerns about inflation still exist, the call for rate cuts cannot be realized in the short term; therefore, Warsh may only maintain the status quo, and if inflation issues persist, rate hikes may be delayed until early 2027.

Daniel Pavilonis, a senior broker at StoneX Group, pointed out that the U.S.-Iran peace agreement has become a key external variable that could change annual inflation and internal divisions within the Fed. If the agreement goes smoothly, shipping in the Strait of Hormuz resumes, and a massive influx of crude oil enters the market, the extent of the oil price correction may exceed expectations; historically, oil prices have dropped by $30 within four weeks, and this geopolitical easing will rapidly lower overall inflation readings.

Pavilonis expects that after the cooling of inflation, the hawkish members advocating for rate hikes within the committee will gradually adopt a neutral stance. At the same time, he predicts that the Trump administration will introduce various policies to support the stock market before the November midterm elections, maintaining capital market vitality.

Weak forward guidance may exacerbate market volatility

Before taking office, Warsh repeatedly criticized the current communication framework during congressional hearings and speeches at the IMF, stating that the Fed over-discloses its policy roadmap, and frequent public speeches by officials make the central bank bound by its own words, losing flexibility in response to changes in the economic environment, leading policymakers to become "prisoners of their own statements."

Previously, Bernanke stated that 98% of monetary policy relies on communication and 2% on operations, whereas Warsh hopes to completely rewrite this model, with the core idea being to drastically reduce market forward guidance and limit the scale of public information disclosure.

William English, a Yale University professor and former FOMC secretary, warned that significantly shrinking the communication mechanism carries notable risks: rapid declines in transparency will exacerbate financial market volatility, making policy adjustments likely to exceed market expectations.

Combining Warsh's statements with projections from several institutions, there are multiple potential avenues for communication reform:

• Simplifying the quarterly SEP, or even gradually abolishing the dot plot;
• Drastically shortening the text of FOMC post-meeting policy statements;
• Reducing the number of press conferences following policy meetings, which is currently eight per year, implemented since 2011;
• Restricting the frequency of public speeches by board officials. Over recent years, the annual speaking volume of Fed officials has increased by 20% compared to twenty years ago.

Cindy Beaulieu, Chief Investment Officer at Corning Asset Management (GLW), believes that if the dot plot is abolished and press conferences are reduced, bond market volatility will significantly rise, and every piece of economic data will trigger excessive market speculation.

Claudia Sahm, a former Fed economist at New Century Consulting, commented that Warsh's push for a vague communication model is similar to the Greenspan era, where Greenspan's ambiguous statements were a hallmark communication strategy. However, even during Greenspan's tenure, central bank transparency reforms had already begun. Events like the taper tantrum in 2013 demonstrate that completely vague communication can instead trigger intense market sell-offs; today, the majority of Fed observers agree that moderate transparency is more conducive to stabilizing expectations.

Don Kohn, former Vice Chairman of the Fed, pointed out that once the central bank communication mechanism is modified, it is difficult to revert back. If the reforms lead to sustained market turbulence, the subsequent correction costs will be extremely high, thus requiring broad consensus among all FOMC members for any adjustments.

He stated that the SEP was introduced in 2007 and can be adjusted or abolished without a committee vote, but Warsh is likely to avoid consuming consensus on secondary topics like the dot plot and guidance, thus most likely will not implement radical reforms all at once, opting for a step-by-step review and optimization.

Market bets on Warsh's policy guidance, will long-term gold bull run persist?

John Murillo, Chief Business Officer at B2BROKER, stated that the catalyst for the meeting's market activity is not the interest rate decision but the Fed's policy guidance, with a core focus on whether Warsh will reinforce the view of maintaining a tight policy until 2027.

He pointed out that if the dot plot and policy statement release unexpectedly hawkish signals, asset prices will follow a fixed transmission order: the U.S. Treasury market will react first, with real yields rising and pushing up bond yields, causing the short end of the curve to experience the most volatility; stronger yields will support the rise of the U.S. dollar index and directly put pressure on gold.

However, Murillo cautioned that the temporary shock from the Fed's policy will not reverse the long-term upward trend of gold. Three structural advantages continue to support the value of precious metal allocation: central banks globally are continuing to purchase gold to diversify reserves, the ongoing geopolitical conflict in Iran maintains demand for safe-haven assets, and the long-term pressure of the U.S. fiscal deficit drives capital allocation towards hard assets. Even if the meeting releases hawkish signals leading to a decline in gold prices, the downtrend will only attract medium- to long-term buyers, making it difficult to form a persistent bear market. Over an extended period, structural demand remains the core factor determining gold price trends.