No hope for interest rate cuts this year? The FOMC Minutes are more hawkish than Powell!
The Federal Reserve's June meeting minutes released unexpectedly hawkish signals. Morgan Stanley pointed out that officials' concerns about the persistence of inflation have intensified, with most participants believing that tariffs could lead to persistent inflation and risks of destabilizing expectations, and they do not expect interest rate cuts within the year. The Federal Reserve remains in a wait-and-see mode, emphasizing "there are good conditions to wait for more clarity." Although some officials believe that a rate cut "may be appropriate," decisions are highly dependent on inflation data
Concerns within the Federal Reserve about the persistence of inflation are intensifying, which may lead to market expectations for interest rate cuts this year being dashed.
According to news from the Chase Trading Desk, the latest research report from Morgan Stanley shows that the minutes from the Fed's June meeting indicate that officials' concerns about the persistence of inflation have increased. Most participants believe that tariffs could lead to sustained inflation and pose risks to the stability of inflation expectations, a stance that is more hawkish than Chairman Powell's position at the June press conference. Morgan Stanley predicts that the Fed will not cut interest rates this year, but will cut rates by 175 basis points in 2026.
Tariff Concerns Exceed Expectations, Inflation Risk Remains a Major Consideration
In June of this year, after the Fed's interest rate decision remained unchanged, Powell stated at a press conference that the impact of tariffs on inflation could be more stubborn, and he expects a certain degree of inflationary pressure to rise in the coming months. The overall impact of tariffs, how long they will last, and when they will fully manifest are all highly uncertain. He expressed satisfaction with the labor market situation, stating that "the labor market is not calling for interest rate cuts."
In Morgan Stanley's view, this time the Federal Open Market Committee (FOMC) minutes are more "hawkish," and the key content supporting the hawkish view remains—inflation. "Most participants" still believe that tariffs could lead to persistent inflation and pose risks to the stability of inflation expectations.
The minutes noted that when discussing the inflation outlook, participants observed that increased tariffs could exert upward pressure on prices. However, there is considerable uncertainty regarding the timing, scale, and duration of these effects.
The investment bank estimates that the current effective tariff rate is about 17-18%, significantly higher than the 13% level at the time of the June meeting.
An article from Wall Street Insight stated that the June meeting minutes show that while some participants pointed out that tariffs would lead to a one-time increase in prices that would not affect long-term inflation expectations, most participants believe that tariffs could have a more lasting impact on inflation. At the same time, the rapidly changing economic policy environment makes the Fed's policy judgments more complex. Trump has expanded the scope of tariffs imposed on U.S. trading partners while advancing policy changes in areas such as taxation, immigration, and regulation, all of which have exacerbated economic uncertainty.
Rate Cuts Possible, but Highly Dependent on Inflation Situation
The research report stated that regarding the current policy stance, the June meeting minutes show that the Fed's assessment of the degree of tightening has softened slightly, describing it as "moderate or mild tightening," rather than "moderate tightening" as in May.
At the same time, when assessing the appropriate policy path, "most participants judged that lowering the (interest rate) target range this year... may be appropriate." However, they set the following reference indicators for expected rate cuts: inflation pressure is "temporary or mild," medium- to long-term inflation expectations are firmly anchored, or there is some weakness in economic activity and labor market conditions Therefore, Morgan Stanley states that it is reasonable to remain patient at this time:
If the transmission effect of tariffs on inflation is lower than expected, or if the labor market significantly weakens, then most people currently expecting one or more rate cuts this year may achieve their plans. Currently, the Federal Reserve is uncertain which concern carries more weight. Therefore, remaining patient is reasonable.
However, Morgan Stanley emphasizes that the FOMC's decisions are highly dependent on inflation data, rather than employment data.
FOMC participants discussed various scenarios, and the described response function is highly dependent on inflation data, with relatively low dependence on employment data.
Wait, continue to wait
Morgan Stanley's report points out that, given the economy's "robust" growth, the unemployment rate being "low," the policy being restrictive, and the high uncertainty regarding tariff impacts, the FOMC remains in a wait-and-see mode, reiterating that they "have good conditions to wait for more clarity."
The bank maintains its forecast: no rate cuts in 2025, but in 2026, when the inflation shock proves to be temporary and actual economic activity slows due to tariffs acting as taxes on consumer and business spending, a rate cut of 175 basis points will occur.
An article from Wall Street Journal mentions that the FOMC meeting minutes show that most Federal Reserve officials still believe that the overall U.S. economy is stable, allowing them to remain patient regarding interest rate adjustments. The minutes state:
Policymakers believe that economic growth is "robust," and the unemployment rate is "low." Participants unanimously agree that, despite the reduced uncertainty regarding inflation and economic outlook, a cautious approach should still be taken when adjusting monetary policy.
Federal funds futures contracts indicate that investors expect one rate cut in September and another in December. Powell's recent public statements have not paved the way for a rate cut in July, and the market generally believes that September is more likely to be the starting point for a rate cut.
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