Minutes from the Federal Open Market Committee's June meeting released on Wednesday indicated that policymakers are not eager to cut interest rates until additional data confirms that inflation is moving sustainably toward the committee's 2% target.
FOMC Inflation Data and Economic Outlook
The minutes of the June meeting showed the Fed remaining cautious despite recent strong inflation readings, with the majority of participants seeing economic growth slowing gradually and many viewing the current policy stance as subdued.
Participants generally agreed that the Fed's tight monetary policy has restrained consumption and investment growth, leading to a gradual economic slowdown.
Others have suggested that continued economic strength and other factors mean that long-run equilibrium interest rates may be higher than previously thought.
In such a scenario, monetary policy and overall financial conditions may both be less restrictive than they are today, implying that interest rates will need to remain high for a longer period.
While consumer price inflation is significantly slower than it was a year ago, progress toward the 2% inflation target has been slow in recent months.
“Participants noted that progress in containing inflation has been slower this year than they had expected in December,” the minutes said.
Moreover, several participants noted that if inflation remains elevated or rises further, “it may be necessary to raise the target range for the federal funds rate.”
Labor market more balanced, but inflation risks remain
Inflation risks are seen as trending upwards due to potential persistent inflationary trends and unexpected supply-side disruptions.
Risks to persistently elevated inflation include a worsening geopolitical situation, escalating trade tensions, continued home price increases, an insufficient tightening of financial conditions, and an unexpectedly expansionary U.S. fiscal policy. These factors could also pose upside risks to economic activity.
Several participants noted the risk that long-term inflation expectations may become unanchored.
According to the FOMC, the labor market is showing signs of easing pressures and improving balance.
The policymakers suggested that “with labor market tightness easing and inflation declining over the past year, risks to the Committee's employment and inflation objectives have become more balanced and monetary policy is better positioned to address the risks and uncertainties facing both sides of the Committee's dual mandate.”
Fed's June outlook and Chairman Powell's comments
The Fed's new forecast for the median federal funds rate for 2024, released in June, projected just one rate cut by the end of the year, down from three in its March forecast and significantly less than the two that market participants had widely expected.
Fed Chairman Jerome Powell said at the June meeting that the decision to cut rates once or twice was “a very delicate one,” and stressed the need to build confidence in deinflationary trends before cutting rates.
Powell sounded more optimistic about the path of deflation on Tuesday, predicting inflation will be between 2% and 2.5% within a year.
He stressed that the labor market is “moderately cooling” and said policymakers are carefully weighing the risks of easing monetary policy too early or too late.
Market reaction
The U.S. Dollar Index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF UUP, pared its losses for the day as the market took the June Fed meeting minutes as somewhat hawkish.
The reaction was primarily observed in the foreign exchange market as Wall Street closed early at 1 pm ET.
Bonds and stocks both ended higher in the shortened trading session ahead of the July 4th holiday, with the S&P 500 and Nasdaq 100 hitting record highs before the close.
The SPDR S&P 500 ETF Trust SPY rose 0.4%, and the tech-focused Invesco QQQ Trust QQQ added 0.8%.
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Illustration from photos by Federalreserve/Flickr and Bylolo/Unsplash.