Since March 1st, the Iran war has been the undisputed star of the bond and mortgage rate show, driving most of the market’s movement and volatility. Everything else was basically opening-act material. Economic data tried to get some attention here and there, but markets mostly shrugged and went back to watching geopolitical headlines.
That started to change with the jobs report two weeks ago, and it changed even more dramatically with this week’s Fed announcement. The good news? Most of the initial damage was quickly walked back before the week was over.
Rates kicked off the week in a pretty good mood as hopes for an Iran peace deal continued to gain traction. By last Thursday, markets had already priced in much of the peace-deal optimism, but reports that senior officials were actually signing on the dotted line gave bonds one more reason to celebrate. By Tuesday, yields had fallen to their lowest levels in a month.
Then Wednesday happened.
The week’s only meaningful burst of volatility arrived shortly after the Federal Reserve’s announcement. Since this was the first Fed meeting under new Chair Kevin Warsh, some observers were quick to point fingers at the new boss. While there’s a case to be made there, the simpler explanation is that the infamous dot plot did most of the heavy lifting.
What Exactly Is the Dot Plot?
Four times a year—in January, March, September, and December—the Fed releases its Summary of Economic Projections (SEP). Buried inside is one of Wall Street’s favorite puzzles: a collection of forecasts from individual Fed members showing where they think the Fed Funds Rate will be in coming years.
These forecasts appear as both a table and the famous “dot plot.”
Why do people care so much about a bunch of dots? Because traders spend their days trying to guess how the Fed will react to future economic data. The dots either validate those guesses or send everyone back to the drawing board.
This week, markets were pricing in the possibility of a rate hike before year-end, but there was still plenty of room for the Fed to stay put. The dot plot essentially said, “You know that rate hike you’re worried about? You might want to worry a little more.”
Looking specifically at the 2026 column, the median Fed member projected no rate changes by year-end back in March (3.375%). Fast forward to June, and that median projection moved up to 3.625%.
Even more interesting, nearly half of the Federal Open Market Committee now expects two rate hikes by December. That’s a noticeably more hawkish outlook than markets were expecting.
The dots also drifted higher for 2027 and 2028. Taken together, the message was clear: the Fed’s outlook had become more hawkish, and markets reacted immediately when the dots hit the screen at 2:00 p.m. ET.
So Where Does Warsh Fit Into All This?
Opinions on Kevin Warsh’s first press conference were all over the map, so let’s stick to the facts.
Contrary to some expectations, Warsh didn’t spend time building a case for rate cuts. He also didn’t advocate for hikes. In fact, he mostly avoided forward guidance altogether.
Perhaps more importantly, he didn’t try to soften the hawkish tone of the dot plot.
Former Chair Jerome Powell often acted as a balancing force during press conferences. If the dots looked overly hawkish, Powell might emphasize uncertainty. If they looked overly dovish, he’d point out risks on the other side. That approach often helped calm markets and encourage more nuanced interpretations.
Warsh took a different route.
While he did describe the dot plot as being “written in pencil, not in pen,” he didn’t suggest those pencils were drawing an especially aggressive picture. Nor did he provide additional clues about how the Fed might react to economic data over the next six weeks.
For traders hoping for guidance, the answer was essentially, “You’ll find out when we do.”
Some market participants felt that uncertainty alone justified weaker trading levels and higher risk premiums.
How Did It All Shake Out?
By Friday, much of the Fed-related damage had been reversed in longer-term rates like the 10-year Treasury yield. Shorter-term rates, however, held onto more of their losses.
The shortest-term expectations—those tied directly to future Fed policy—barely recovered at all.
The chart below shows expected Fed Funds rates for December.
Following Wednesday’s announcement, expectations rose by roughly 0.18%. Even more striking, those expectations are now almost a full percentage point higher than they were before the Iran war began.
Back in late February, markets expected two rate cuts this year.
Now?
They’re looking at the possibility of two hikes instead.
That’s quite a plot twist.
What About Mortgage Rates?
Fortunately for borrowers, mortgages tend to behave more like 5- to 10-year Treasury securities than ultra-short-term rates such as Fed Funds futures.
As a result, mortgage rates didn’t experience the same dramatic reaction on Wednesday. They moved higher, but not excessively, and by Thursday they had already recovered about half of those losses.
Zooming out a bit, this week’s volatility barely registers on the larger chart. Mortgage rates remain elevated compared to most of the past ten months, but this week’s swings were relatively tame in the grand scheme of things.
What’s Next?
Iran-related developments will continue to matter. While the memorandum has been signed, official peace has not yet been formally confirmed.
If that confirmation arrives—and especially if oil prices continue behaving themselves—rates could enjoy additional gradual improvements.
Beyond that, markets will slowly return to their favorite pastime: obsessing over economic data.
Inflation reports will be especially important as investors try to determine whether recent fuel-price increases leave any lasting effects. Until then, traders will continue doing what they do best: staring at charts, interpreting dots, and occasionally changing their minds several times before lunch.