Bowman turn, oil plunge challenge Fed's hawkish tilt

- Financial markets have consistently overestimated the Federal Reserve's readiness to cut interest rates in recent years. But the latest Fed chatter, softening economic data and a dramatic reversal in oil prices suggest they could be right this time. The central bank last week appeared to pour ice cold water on traders' hopes for a dovish steer. In the Fed's summary of economic projections, officials maintained their median 'dot plot' projection of two 25 basis point rate cuts this year. But it was an extremely close call, and they lowered their 2026 forecast to one cut from two. Get a look at the day ahead in European and global markets with the Morning Bid Europe newsletter. Sign up here. Advertisement · Scroll to continue The consensus view in the days that followed was that policymakers' hawkish tilt reflected their commitment to anchoring inflation expectations. Traders' projections for rate cuts this year duly slipped to under 50 basis points. But maybe this read was premature. First, concerns about rising energy prices due to conflict in the Middle East have disappeared. Even though oil rose as much as 17% in the days after the Israel-Iran war erupted on June 13, it is now back below that level. The price is plunging and late on Monday U.S. President Donald Trump announced that the two enemies had agreed on a ceasefire. Advertisement · Scroll to continue On top of that, a chorus of dovish comments from Fed officials in recent days - and not just from the usual suspects - suggests the U.S. central bank may be closer to cutting rates than thought less than a week ago. Citi's U.S. economic surprises index Citi's U.S. economic surprises index Purchase Licensing Rights, opens new tab Brent crude oil down 20% year-on-year Brent crude oil down 20% year-on-year Purchase Licensing Rights, opens new tab NEGATIVE SURPRISE There is certainly some justification for a dovish turn. On a fundamental level, U.S. economic data is softening. Citi's U.S. economic surprises index has been falling since the end of May and is now negative, meaning that economic data is underperforming consensus expectations. Last week it fell to the lowest since September last year. Caution is required, of course, when analyzing economic surprise indices after significant moves because expectations may have been too pessimistic or optimistic to begin with. But the current shift seems to be a legitimate red flag. "We look at both the momentum of reported data and its surprise versus consensus expectations. Both have dropped into negative territory," Citi's Stuart Kaiser notes, pointing out that the 'hard' activity data index is now negative.