On June 18, Caixin reported that the increasing uncertainty regarding tariffs, oil prices, and their escalating impact on inflation is heating up a risk in tonight's Fed decision, namely that Fed officials may not be able to cut rates twice this year as they had previously expected...

The Fed is set to announce its June rate decision at 2 AM Beijing time on Thursday, and it is easy to foresee that the 'dot plot' reflecting Fed officials' expectations for this year's rate policy changes will obviously become the focus of many market participants at that time.

In the previous dot plot from March, the median expectation of Federal Reserve officials indicated two rate cuts before the end of this year. Meanwhile, federal funds futures traders currently believe that the probability of the Fed actually cutting rates less than twice is only 37.7%!

This clearly adds a significant risk to tonight's market: if the June dot plot reflects that there is only one rate cut expectation left this year, will investors who were 'eagerly anticipating' two rate cuts be greatly disappointed?

Matthew Ryan, head of market strategy at financial services firm Ebury, stated in an email on Monday that the company believes that two rate cuts within the year will still be the baseline expectation for most Fed policymakers, and given the current tariffs' significant uncertainty, they may not have enough confidence to substantively change their views. However, there is also a risk that a minority of officials may believe that the number of rate cuts this year will be less than previously expected, which could be enough to tilt the decision-making scale toward only one rate cut (25 basis points) in 2025.

He added, 'A hawkish dot plot, combined with Powell emphasizing not rushing to cut rates, could provide some room for the dollar to strengthen later this week.'

Over the past three months, Fed officials have consistently expected that the inflation rate and core inflation rate (based on their preferred inflation measure, the PCE price index) will reach 2.7% and 2.8%, respectively, by 2025, and then gradually decline to the 2% target level in 2027 and beyond.

Since December of last year, they have also held the federal funds rate target steady at 4.25% to 4.5% for three consecutive meetings. Currently, traders widely expect Fed policymakers to implement the first rate cut of 2025 in September.

In fact, the risk factors that make the Fed reluctant to cut rates early have recently been present and continue to accumulate.

On April 2, U.S. President Trump announced a 10% base tariff on most imported goods, and during the 90-day pause for reciprocal tariffs he set (which will expire in July), this trade war still lacks a permanent solution, increasing the uncertainty of inflation expectations. Additionally, the conflict between Israel and Iran, which erupted late last week, has continued for five days, leading to increased oil price volatility and raising concerns that supply disruptions could trigger a new wave of inflation.

Greg Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities in New York, stated that market participants will respond to the 'dot plot and how it relates to the Fed's inflation forecasts' on Wednesday.

Faranello pointed out that if the Fed's latest dot plot predicts only one rate cut in 2025, this could be seen as 'more hawkish' and could lead to an increase in short-term rates (such as the 2-year Treasury yield), which would become a buying opportunity for some investors.

Faranello wrote that Treasury yields have been oscillating in a range for about two months, and participants in the interest rate market have stated, 'We don’t know what will happen next.' Faranello also mentioned that the Fed may not cut rates at all this year.

Faranello believes that compared to the expectations for this year's interest rate direction in the dot plot, traders may not pay much attention to the Fed's updated rate forecasts for 2026 and 2027 due to too much uncertainty in the inflation outlook, and they may react more cautiously to Powell's press conference as the Fed Chair's term will end next year and Trump will seek a successor.

“The overall trajectory of interest rates is certainly going to decline, that is for sure. The question is how quickly we achieve this,” the strategist added.