[Reuters Analysis] Bowman turn, oil plunge challenge Fed's hawkish tilt: McGeever

ORLANDO, Florida, June 25 (Reuters) - 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.

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.

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.

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.

180 DEGREE TURN?

But an even bigger surprise for investors on Monday came from Fed Vice Chair for Supervision Michelle Bowman, who said she would consider voting for a rate cut as soon as July if inflation pressures "remain contained".

Bowman's comments are significant. Granted, she has not spoken publicly about the economy or policy for two months, and in March she signaled that labor market conditions would likely become more important in the policymaking debate.

But she has consistently been one of the more hawkish members of the Federal Open Market Committee since her appointment as Fed Governor in 2018.

This came after Governor Christopher Waller, one of the FOMC's most reliably dovish members, on Friday said a rate cut next month should be on the table. That's no surprise. But if an FOMC hawk like Bowman is now singing from that same hymn sheet, traders and investors need to take notice.

A cynic might wonder about the timing of Bowman's seemingly 180-degree turn, coming just as Trump has intensified attacks on Fed Chair Jerome Powell for not cutting interest rates. But there's no evidence to suggest political pressure is at play.

And the recent oil price plunge will help her argument. On Monday, it tumbled 7%, the biggest decline in three years. This was even more remarkable considering it had opened the day 6% higher and hit a five-month high in response to the U.S. bombing of Iranian nuclear facilities on Saturday.

Moreover, at no point following Israel's initial June 13 strike on Iran did the price of crude rise on a year-over-year basis. Indeed, oil prices have fallen since January, and are now down 20% year on year. If inflation is proving sticky, it's not because of energy prices.

This will be music to Waller's - and now Bowman's - ears.

And with one of the Fed's hawks now appearing to draw in their claws, it is possible that traders may not be overestimating the Fed's readiness to cut rates this time around. Their bets of 125 bps of easing by the end of next year, starting soon, could be close to the mark.

(The opinions expressed here are those of the author, a columnist for Reuters)

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