The key signal for the Federal Reserve's interest rate cut in September is about to be revealed

The Federal Reserve's June meeting minutes will be released at 12:00 AM Beijing time on Thursday, with the market seeking key clues for a rate cut in September. Strong employment data has ruled out the possibility of a rate cut in July, and investors are now focused on the monetary policy meeting on September 16-17.

Economists point out that there is a clear division within the Federal Reserve, with one faction advocating no rate cuts this year, while another supports two to three rate cuts. The hawkish stance has significantly strengthened after the June meeting, with 7 officials expecting no rate cuts this year, a substantial increase from 4 in March.

Federal Reserve Chairman Jerome Powell, in his congressional testimony following the June meeting, anticipated that inflation would rebound in June, July, and August. Analysts believe this suggests that September may become the first meeting to seriously consider a rate cut. Citigroup believes that the minutes will release a more dovish signal than expected, and the "wait-and-see" period for rate cuts may end by late summer.

Citigroup believes that although last week's strong employment data has blocked the possibility of a rate cut in July, the consensus among Federal Reserve officials on cooling inflation is driving the process for a rate cut to begin in September. The bank still believes that the Federal Reserve will start cutting rates in September and will cumulatively cut rates by 125 basis points before March next year.

Strong Employment Data Reshapes Rate Cut Expectations

The strong performance of June employment data has completely changed the market's expectations for a rate cut in July. Economists generally believe that a rate cut at the July meeting is premature, and the focus has completely shifted to the monetary policy meeting on September 16-17.

The Federal Reserve has not adjusted interest rates since December last year, maintaining the benchmark interest rate in the range of 4.25% to 4.5% at the June meeting. Michael Gregory, Deputy Chief Economist at BMO Capital Markets, stated:

"We will carefully study the minutes for clues on how long the Federal Reserve is prepared to wait."

There is a clear division within the Federal Reserve on the issue of rate cuts. The June meeting showed that 7 officials expect no rate cuts this year, a significant increase from 4 officials in March, reflecting a notable strengthening of the hawkish stance.

Meanwhile, some officials have begun to advocate for rate cuts. Federal Reserve governors Waller and Bowman, appointed by Trump, urged their colleagues to consider easing policies in their first public remarks after the June meeting, pointing out that spring inflation data has been moderate.

Recently, San Francisco Fed President Daly and Minneapolis Fed President Kashkari have both expressed an open attitude toward rate cuts in the fall. However, other officials still advocate for caution.

Inflation Expectations as a Key Consideration

Powell described the labor market as solid during the June press conference and indicated that inflation is expected to rise due to the president's tariff plans. This explains the Federal Reserve's reason for maintaining a wait-and-see stance.

Citigroup believes that the uncertainty surrounding the economic outlook has decreased, and the wording of the May meeting minutes will need to be adjusted. This paragraph may be revised to:

The uncertainty surrounding the outlook has decreased, and the committee expects to gather more data on the effects of policy during the summer. This will strengthen the view that core members of the committee may support a rate cut in September. Matt Luzzetti, Chief U.S. Economist at Deutsche Bank, believes that Powell's expectation of inflation rising in June, July, and August during his congressional testimony clearly suggests that September will be the first meeting to actively consider a rate cut.

Stephen Stanley, Chief U.S. Economist at Santander, pointed out that the Federal Reserve predicts a slowdown in future growth but an increase in inflation, which is a nightmare scenario for every central bank governor.

Laura Goodwin, an economist at New York Life, expects the Federal Reserve to "do as little as possible for as long as possible":

“A 25 basis point rate cut has limited impact on alleviating policy uncertainty or global supply chain issues.”

Matthew Luzzetti from Deutsche Bank stated that the minutes of the meeting are expected to provide more details on the extent of internal disagreements. This information will help the market more accurately assess the likelihood of a rate cut in September and the evolving direction of the Federal Reserve's policy path.

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