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Minutes from June’s Federal Open Market Committee (FOMC) meeting that were released Wednesday indicate that policymakers are not eager to cut interest rates until additional data confirms that inflation is moving sustainably toward the committee's 2% target.
Despite recent encouraging inflation data, the Fed remains cautious on easing rates, according to the June minutes. The majority of participants observed that economic growth is gradually slowing, with many viewing the current policy stance as restrictive.
Participants generally agreed the Fed's restrictive monetary policy is curbing growth in consumption and investment, contributing to a gradual economic slowdown.
Some noted that continued economic strength and other factors might suggest the longer-run equilibrium interest rate is higher than previously thought.
In such a scenario, both monetary policy and overall financial conditions could be less restrictive than they currently seem, implying the need to maintain higher-for-longer interest rates.
While consumer price inflation is significantly lower than a year ago, progress toward the 2% inflation objective has been modest in recent months.
“Participants noted that progress in reducing inflation had been slower this year than they had expected last December,” the minutes said.
Moreover, several participants noted that if inflation were to remain high or rise further, “the target range for the federal funds rate might need to be raised.”
Inflation risks are perceived to tilt upward due to potential persistent inflation dynamics or unexpected supply-side disruptions.
Risks that could keep inflation elevated include worsening geopolitical developments, heightened trade tensions, persistent shelter price inflation, insufficiently restrictive financial conditions or unexpectedly expansionary U.S. fiscal policy. These factors could also pose upside risks to economic activity.
Several participants cited the risk of unanchored long-term inflation expectations.
The labor market has shown signs of better balance, with reduced tightness, according to the FOMC.
Policymakers hinted that “with labor market tightness having eased and inflation having declined over the past year, the risks to achieving the committee's employment and inflation goals had moved toward better balance, leaving monetary policy well positioned to deal with the risks and uncertainties faced in pursuing both sides of the committee's dual mandate.”
Fed’s June Projections And Powell’s Remarks
In June, the Fed’s new projection for the 2024 median Fed funds rate indicated just one cut anticipated by year-end, compared to three in March's projection and the two widely expected by market participants.
Fed Chair Jerome Powell said at the June meeting that the decision between one versus two cuts was “a very close call.” He also stressed the need to build confidence in the disinflation trend before cutting interest rates.
On Tuesday, Powell sounded more optimistic on the disinflation path, expecting inflation to be between 2 and 2.5% within a year.
He stressed that the labor market is “cooling off appropriately” and that policymakers are carefully considering the risks of acting too early or too late in easing monetary policy.
The market viewed the June Fed meeting minutes as somewhat hawkish, causing the U.S. Dollar Index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), to reduce its losses for the day.
This reaction was mainly observed in the foreign exchange markets since Wall Street closed early at 1:00 p.m. ET.
Both bonds and stocks closed higher the shortened trading session ahead of the July 4 holiday, with the S&P 500 and Nasdaq 100 reaching new record highs before the closing bell.
The SPDR S&P 500 ETF Trust (NYSE:SPY) increased by 0.4%, while the tech-focused Invesco QQQ Trust (NASDAQ:QQQ) rose by 0.8%.
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Illustration via photos from Federalreserve/Flickr and Bylolo/Unsplash.
