The Federal Reserve may reveal a "hawkish" dot plot tonight, and a rate cut once this year will become the new consensus in the market?

The Federal Reserve is about to announce its interest rate decision and economic forecasts. This time, the focus of the meeting is not whether to cut rates, but rather the possibility of a "hawkish" dot plot, which may reshape investors' expectations for the rate cut path in 2025.

According to the schedule, at 2:00 AM Beijing time on June 20 (Thursday), the Federal Reserve will announce its interest rate decision and the updated Summary of Economic Projections (SEP), followed by a press conference with Chairman Jerome Powell.

Market consensus is highly consistent with a Reuters survey, which expects the Federal Reserve to keep the interest rate unchanged in the range of 4.25%-4.50%. The Reuters survey shows that out of 105 economists, 103 expect the rate to remain in the 4.25%-4.5% range, while 2 expect a 25 basis point cut.

Although the interest rate decision is largely a foregone conclusion, the key focus is on the significant adjustment of the dot plot. The previous March dot plot indicated two rate cuts in 2025, but now an increasingly strong hawkish voice believes that the median of the dot plot may shift upward, suggesting only one rate cut this year. Bank of America expects only one rate cut this year, while Goldman Sachs and JP Morgan also anticipate that the dot plot may release hawkish signals, which could be the "hawkish bomb" most likely to ignite the market in this meeting.

The economic forecasts (SEP) adjusted in sync with the dot plot will provide data support for the Federal Reserve's cautious stance. Due to the potential impact of tariffs, the Federal Reserve may depict a more "stagflationary" economic picture: inflation forecasts will be significantly raised, while economic growth and unemployment rates may face downward adjustments.

Hawkish Dot Plot Becomes the Biggest Variable: Will One Rate Cut This Year Become the New Consensus?

Looking back at the March meeting, the dot plot at that time indicated two rate cuts in 2025 (50 basis points), providing the market with a relatively clear easing path. However, the subsequent uncertainty surrounding tariff policies has become the core variable dominating the market, making this blueprint full of uncertainties.

Now, there is a significant divergence on Wall Street regarding the direction of the dot plot, but the hawkish sentiment is gradually gaining the upper hand:

Hawkish Camp (Bank of America, JP Morgan)

• Bank of America's position is the most pronounced, with analysts expecting the median of the 2025 dot plot to be raised by 25 basis points, clearly indicating only one rate cut this year. However, Bank of America also points out that the 2026 dot plot may show a 75 basis point rate cut space, suggesting that the delayed rate cuts have not disappeared, just postponed.
• JP Morgan also believes that the dot plot will be revised towards a "moderately hawkish" direction, with the median likely changing from two rate cuts to one. Their logic is that Powell has already focused on price stability in the May meeting, and the hawkish tendencies within the committee are strengthening.

Cautious Maintain Camp (Goldman Sachs, Citigroup)

• Goldman Sachs and Citigroup expect the median of the dot plot to remain at two rate cuts. However, this is not a dovish signal. Goldman Sachs specifically points out that this could be a "very close split," with the officials supporting two rate cuts (10 officials) only slightly outnumbering those supporting one or zero rate cuts (9 officials).

• Citigroup believes that the Federal Reserve tends to view the impact of tariffs as a "one-time" price shock, and therefore has no motivation to release excessive hawkish signals by raising the dot plot.

Economic Forecast: A Difficult Balance Under the Shadow of Stagflation

The Summary of Economic Projections (SEP) will serve as a "manual" for understanding the Federal Reserve's decision-making logic. This adjustment of the SEP will be a typical "stagflation-style" correction, providing ample justification for the Federal Reserve's "wait-and-see" approach.

GDP growth forecasts will be revised downwards, with Goldman Sachs expecting a drop from 1.7% to 1.4%, and the unemployment rate forecast rising to 4.5%.

Inflation Forecast (PCE) Significantly Revised Upward: This is a consensus among various institutions. Due to the need to account for the transmission effects of tariffs, the core PCE inflation forecast for 2025 will be significantly revised upward. Citigroup expects the core PCE in 2025 to jump from 2.8% to 3.3%, JP Morgan expects an increase from 2.8% to 3.2%, and Goldman Sachs and Bank of America hold similar views. This is the most direct basis for delaying and reducing interest rate cuts.

Economic Growth (GDP) Forecast Downgraded: The negative impact of tariffs will be reflected in growth expectations. Goldman Sachs expects GDP growth in 2025 to decrease by nearly 1 percentage point, with fourth-quarter GDP growth slowing to 1.25%. JP Morgan and Bank of America also expect the growth forecast to be downgraded from 1.7% to 1.4%.

Unemployment Rate Forecast Slightly Revised Upward: Along with the slowdown in growth, the unemployment rate is expected to rise slightly from 4.4% to around 4.5%. However, this is still at historically healthy levels and far from triggering the Federal Reserve's emergency interest rate cut alarm.

It is worth noting that despite the significant upward revision of inflation forecasts, major investment banks generally believe that Federal Reserve officials view tariff-related inflation as "one-time" in nature, which leaves room for future policy adjustments.

An article from Wall Street previously mentioned that what the Federal Reserve truly cares about is inflation expectations. Timiraos' article points out that economic theory suggests that when companies expect future costs to rise, they will raise prices in advance to pass on costs; if workers expect living costs to rise, they will also demand higher wages. If this psychological expectation spreads, it could lead to self-reinforcing inflation. Whether the Federal Reserve cuts interest rates this year and by how much will partly depend on how officials view the risks of inflation expectations.

Regarding the impact of tariffs, Goldman Sachs expects the effective tariff rate to ultimately rise by 14 percentage points, impacting consumer spending through a tax-like mechanism and affecting corporate investment due to policy uncertainty, ultimately reducing GDP growth by nearly 1 percentage point in 2025.

Rabobank points out that the stagflation impact of tariffs may pull the Federal Reserve in two opposite directions: the impact of tariffs on rising unemployment requires interest rate cuts to support economic activity, while a rebound in inflation may necessitate rate hikes to control overall demand

FOMC Statement and Powell's Remarks: "Walking a Tightrope" Amid Uncertainty

In addition to the numbers, the art of wording is equally crucial; the subtle adjustments in the FOMC statement and Powell's speech are also vital.

Regarding key changes in the wording of the statement, Bank of America predicts that the description of the economic outlook may shift from "uncertainty has increased further" in May to a more neutral "uncertainty remains high." This reflects that although the situation has eased somewhat (such as the reduction of tariffs between the U.S. and China), the overall outlook remains shrouded in fog.

The expression regarding inflation may also be adjusted. Despite recent inflation data generally falling below expectations, Morgan Stanley believes that considering the anticipated tariff effects and the rise in oil prices due to geopolitical risks in the Middle East, the Federal Reserve's assessment of inflation may remain unchanged.

Powell's balancing act. Powell is expected to reiterate the core message from the May press conference: policy is in a good position, and the Federal Reserve does not need to rush into action. Analysts believe he will downplay the predictive role of the dot plot, emphasizing that it is merely a hypothetical scenario under specific conditions, highly dependent on the extremely uncertain economic and policy outlook.

Citigroup analysts point out that if Powell links the recent slowdown in inflation to plans for interest rate cuts later this year, such discussions may appear particularly dovish.

Dollar Outlook: Can Hawkish Signals Rescue "Structural Weakness"?

From traditional logic, a more hawkish Federal Reserve should be a catalyst for a stronger dollar. However, the impact of this meeting on the dollar may be more complex and nuanced.

Bank of America analysis shows that the dollar has depreciated by about 3.8% over the past month, reaching a low not seen since the Fed began its rate hike cycle in March 2022. Although the dot plot may release hawkish signals, Bank of America expects any dollar rebound based on this will be short-lived.

This judgment is based on a key observation: the foreign exchange market continues to ignore the resilience of U.S. data, instead focusing on potential downside risks. The ongoing dollar sell-off by global real money investors constitutes structural resistance, a behavior pattern that reappears every time the dollar rises.

Therefore, even if the Federal Reserve releases stronger hawkish signals than expected this week, it may be difficult to reverse the dollar's structural weakness trend, and any rise in the dollar may face selling pressure from long-term investors.

In this FOMC meeting, the Federal Reserve will proceed cautiously amid tariff uncertainties. A hawkish guidance pointing to fewer rate cuts and a more stagflationary outlook has almost become a foregone conclusion. However, for the dollar, this "hawkish medicine" may only provide a temporary boost, failing to cure its "chronic weakness" under structural selling pressure and future rate cut expectations