WHAT the JUNE DOTS TELL US ABOUT the SEPTEMBER FLOOR

The Federal Open Market Committee's June Summary of Economic Projections attracted the usual attention to the median dot. The median is a blunt instrument. What matters more is the distribution around it: how many participants sit above the median, how many have shifted since March, and where the doves are anchoring the lower bound of the 2026 path.

The June 2026 projection showed seven participants at or below 4.75 percent for year-end 2026, up from five in March. The median moved 25 basis points lower to 5.00 percent. That shift is modest in arithmetic terms but significant in signal terms: it represents the Committee's collective acknowledgment that the rate path to 2026 is more likely to involve cuts than March implied.

The real information in the June dots is in the 2027 and longer-run projections. The longer-run neutral rate estimate held at 2.75 percent for the second consecutive meeting. That stability is important: the Committee does not believe the post-COVID elevation in rates reflects a permanent shift in the neutral rate.

The desk's reading of the FOMC reaction function entering July to September is that three data points matter more than everything else: the July and August non-farm payrolls, the July CPI and the August PCE.

A July payrolls print below 150,000 with unemployment rising to 4.2 percent or above would shift internal committee deliberation materially. The employment mandate has been the dormant wing of the dual mandate throughout the 2022 to 2025 hiking cycle. At the point where it activates, the pace of easing accelerates.

A July CPI above 3.0 percent headline or above 3.4 percent core would have the opposite effect. It would validate the hawkish minority, embolden Chair Powell to delay and likely produce a September skip.

The base case is that neither extreme materialises: payrolls stay in the 160 to 190 thousand range, unemployment holds at 4.0 to 4.1 percent, and CPI continues its gradual descent toward 2.7 to 2.9 percent. In that environment, September is a live meeting with a 25bp cut as the path of least resistance.

The market has been focused on the first cut date since mid-2024. The desk's view is that the terminal rate debate is more important for asset pricing. A Committee that cuts to 4.00 percent and stops is a different world from one that cuts to 3.25 percent over 18 months.

The current dot plot implies a terminal rate of 3.50 to 3.75 percent by end-2027. That is meaningfully higher than the 2.50 to 3.00 percent terminal rate that prevailed in 2019. The structural reasons for a higher terminal are real: larger fiscal deficits, higher neutral rate estimates, elevated long-run inflation uncertainty.

The implication for fixed income positioning is that duration extension should be calibrated to the terminal rate path, not just the first cut. A 10-year UST at 4.35 percent prices a 2027 terminal around 3.40 percent. That is consistent with the median dot but not with the hawkish end of the distribution.

The desk maintains a constructive view on front-end UST through Q3 2026. The carry on 2-year Treasuries remains attractive relative to the risk of a September skip, which the desk assigns at roughly 24 percent probability.

On FX: a September cut is largely priced into the DXY at current levels around 104. The asymmetry is on the upside for the dollar: a September hold would produce a sharper dollar rally than a cut would produce a dollar selloff, because the cut is more anticipated.

USD-EM is the more interesting trade. A slower FOMC easing path creates carry opportunities in BRL, MXN and COP partially insulated from the US rate timeline. But the tail risk of a September hold would hit EM disproportionately given current positioning.