The recently released June Fed Minutes have unveiled a nuanced approach to future rate hikes, with policymakers acknowledging the likelihood of further tightening measures, albeit at a more tempered pace. Concerns over economic growth prompted a unanimous decision to abstain from a rate increase during the June meeting, providing the Federal Open Market Committee with valuable time to evaluate the progress of the economy towards its dual objectives of maximum employment and price stability — but at the coming July FOMC, markets may not be so lucky.
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Deliberation Amidst an Uncertain Economic Climate
Within the minutes, Federal Open Market Committee members expressed caution, considering various factors that warranted a brief pause in rate hikes. The committee sought to assess the ramifications of the previous aggressive moves, totaling 5 percentage points, the most notable since the early 1980s. Tighter credit conditions and higher interest rates posed headwinds to households and businesses, potentially impacting economic activity, hiring, and inflation. Nevertheless, the extent of these effects remained uncertain, necessitating a meticulous evaluation of the consequences of previous policy actions. This doesn’t mean they’ll “stop the car” — it just means they’ll take their foot off the gas a little.
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Diverging Opinions within the Federal Reserve
The June Fed Minutes revealed a certain degree of divergence among committee members. Projection materials following the June 13-14 session indicated that the majority of participants anticipated at least one rate hike this year, with 12 members projecting two or more increases. Those advocating for a 25 basis point increase highlighted the tight labor market and stronger-than-expected momentum in economic activity. However, even among those in favor of tightening, a consensus emerged that the pace of rate hikes would moderate. The Committee recognized the importance of allowing sufficient time to observe the effects of cumulative tightening and assess its implications for future policy decisions. How much time will be needed to identify the impacts of rate hikes remains to be seen.
Federal Reserve’s Persistent Focus on Inflation
Subsequent to the meeting, policymakers have consistently emphasized their commitment to combating inflation. Fed Chairman Jerome Powell, in his testimony to Congress, underscored the central bank’s ongoing efforts to achieve the target 2% inflation rate, noting that there is still a considerable distance to cover. Powell emphasized the unified stance of the 18 Federal Open Market Committee members, with the majority foreseeing rates remaining steady throughout the year and the majority expecting future rate increases. Despite some reservations, such as Atlanta Fed President Raphael Bostic’s belief that current rates are sufficiently restrictive, policymakers remain cautious as they await the delayed impact of the ten consecutive rate hikes on the overall economy.
Data Alignment with the Federal Reserve’s Position
The available data has largely supported the Federal Reserve’s outlook, despite inflation remaining above the target level. Notably, the Fed’s preferred inflation gauge recorded a mere 0.3% increase in May, although it still reflected an annual rate of 4.6%. Additionally, the labor market has exhibited signs of slight loosening, despite job openings continuing to outnumber available workers by nearly a 2-to-1 margin. In light of these indicators, Fed officials emphasize the importance of narrowing this disparity to mitigate the demand-driven factors that have contributed to higher inflation levels.
Market Reaction to the June Fed Minutes
The market reaction to the June FOMC Minutes was bearish, but somewhat tame.
Following the news, the SPY ETF and the QQQ ETF both notched large red one-minute candles on reasonable volume — however, both are still only marginally lower for the day and neither broke below their low-of-the-day. With recent bullish momentum, and the fact that the Fed minutes didn’t include any bombshell news, this short-term bearish candle could reverse by the end of the day.
July FOMC Hike Odds, and What Comes Next in Inflation
As of this morning, odds of a rate hike at the July FOMC meeting are all but priced in, with an 88.7% chance of a 25 basis point hike, according to the CME FedWatch tool.
Source: CME FedWatch
What’s keeping the remaining 11.3% in the unchanged camp? Some analysts have pointed out the fact that the US will soon begin lapping some aggressive inflation numbers, in particular in the housing and employment area, which should help drive overall inflation data down, and at least look “superficially” positive. A blowout victory over inflation could help push the pace of Fed rate hikes even further, putting the market in position for a possible bullish surprise. In other words, if the inflation read comes in hot, the Fed is likely to hike by 25 basis points in July, which is already expected. If the inflation read comes in very soft, the market may seek to reprice the odds, which would be favorable for bulls. The next FOMC meeting is set for July 26th, and the next CPI report is set for July 12th – just one week away.