One week / one topic: Dot plot twists

What happened?

Kevin Warsh came to play.

As he is taking over from Jerome Powell in the midst of a turbulent political backdrop replete with pressure campaigns, ouster attempts and ad-hominem criminal investigations, many expected him to lean heavily into Trump’s dovish wishes.

Instead, Warsh chose to decisively take another path: the meeting’s statement was slashed to 140 words, most forward guidance was dropped, and he declined to give a personal rate path view in the press conference.

Indeed, a monumental change.

Markets took notice, with a very large jump in short term rates along with sharp steepening of the US curve.

Digging further, the committee importantly also had 9 of 18 participants projecting a hike in 2026, with 6 of those 9 seeing two hikes.

The biggest tell, perhaps, was 2027 core PCE (Personal Consumption Expenditures Price index) being revised 30 bps higher to 2.5%, signaling clear concern about persistence of inflation beyond the recent energy spike.

All in all, Warsh chose to strongly reassert the Fed’s inflation-fighting credentials – and markets believed him.

The problem? Consumers do not agree, and still see elevated and persistent inflation going forward.

Maybe this is just the latest symptom of ‘experts’ having squandered lost all credibility, or maybe the two projections will converge soon – especially if lower oil prices quickly feed into more affordable gas prices at the pump.

Or is there something else at play here?

Our observations

• Fundamentals: In a way, investors are being encouraged to do more of their own homework. (Woo-hoo)

  With forward guidance progressively de-emphasized as a communication tool, I’d expect wider distribution of outcomes to be priced into every meeting going forward.

• Price action: The most telling price move was noticeable by its dissonance with adjacent assets, since – while short-term yields jumped – 30yr rates actually came down.

  If you were looking for a price move that can be characterized as ‘we believe you will do more to fight inflation and therefore we are less concerned about long term rates despite high and rising debt levels’, it would be hard to do better.

• Investor beliefs: Central bankers’ declarations are not created equal, since their perceived importance and ability to move markets depend on underlying circumstances, personality, communication style and much more.

  Noticeably, Warsh’s words made a splash though. Perhaps this is a sign that a change was indeed needed to shake investors off their torpor?

So what?

And yet, and yet… something feels off here.

If investors truly believe that the Fed is going to be more focused on combating inflation – and indeed the proximate cause of recent concerns is abating, as oil prices have almost retraced all the way back to pre-war levels – why have rates expectations continued to climb?

Are markets pricing that the Fed will hike no matter what, or is there indeed reason to believe that inflation is sticky and won’t easily go away?

King Dollar has staged a strong comeback and, at the same time, the price action in gold and Bitcoin is providing another important clue.

With impeccable timing, the high in gold prices occurred exactly on the day that Warsh was nominated for Fed chairman.

Coincidence?

If recent events indeed mark the end of "Fed-as-script-reader" era, with forward guidance gone and dots de-emphasized, term premia should rebuild, intra-meeting volatility should rise, and conviction-based duration positioning has the potential to deliver better outcomes... if we get it right.

As they say: hate the game, not the player…

Mood music: Tower Of Power – We Came To Play – Live

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