Waiting for Walsh's Debut: What Has Changed and What Remains the Same

Morning FX

In the early hours of Thursday Beijing time, Walsh will have his first FOMC meeting since taking office. Although the market widely anticipates no change in rates at the June meeting, the focus this time is not on the policy rate, but on the framework shift that Walsh brings to the Federal Reserve.

Image: Walsh to make his debut in the early hours of Thursday

I. Markets’ Biggest Concern: How Will the Dot Plot Be Drawn?

At the end of each quarter, FOMC meetings customarily release rate guidance. With both inflation and employment rising, current market pricing sees almost one rate hike this year (78% probability), and no rate cuts expected before the second half of next year. The latest minutes show that the majority of committee members support keeping rates unchanged, with hikes not overpowering the neutral stance. Against the backdrop of the ECB taking the lead in hiking and the Hormuz Strait about to reopen, whether the Federal Reserve has a clear plan for a rate hike remains the biggest question.

Image: Rate hike expectations for the year

The current environment for the Federal Reserve is indeed uncertain. The rise in inflation is attributed to oil prices, and if the strait reopens as expected, the Federal Reserve will have no pressing need to hike rates. Meanwhile, with a recovery in employment, there is also no need to cut rates. As Walsh's first public appearance, he is likely to maintain a neutral stance and avoid giving guidance in any direction.

II. More Far-Reaching Change: The Disappearance of Forward Guidance

The dot plot was introduced by Bernanke in 2012, requiring 19 FOMC members to submit quarterly rate forecasts from one-year out to the long run. This mechanism continues to this day and has a significant impact on long-term asset prices.

Image: The March dot plot

But Walsh explicitly opposes such forecasts. He believes the Federal Reserve's predictive success rate is too low, and that when reality contradicts forecasts, it leads to stubborn mistakes. At his confirmation hearing, he made it clear,he does not believe in forecasts, nor does he think the Fed should give guidance. As a statement, Walsh may refuse to submit his personal dot plot forecast and initiate reform to the communication mechanism at the press conference.

From this perspective, the currently low volatility levels in currency pairs, which have dropped to new lows, could face upside risk. Another key focus is whether Walsh will persist with the trimmed mean inflation metric.

Image: FX volatility falls to new lows

III. Summary

(1) Walsh will make his FOMC debut early Thursday morning. In an environment of stronger economic data and the imminent reopening of the Strait, making a clear directional judgment will be difficult—he is highly likely to maintain a neutral stance.

(2) The deeper change brought by the new Chair is in the communication mechanism. Walsh is very likely to refuse to give dot plot and forward guidance; monetary policy uncertainty will challenge the current low volatility environment.

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