Minutes from the Federal Reserve’s June meeting at which rates were held steady pointed to higher rates this year, with perhaps the next hike coming at the July meeting. The Fed acknowledges that inflation has come down since mid 2022, but worries that it may remain stuck well above the Fed’s 2% target. Essentially without signs that inflation is coming down, the Fed is likely to maintain restrictive monetary policy. More hikes could be coming.
Recession Risk
The Fed is willing to see some reduction in economic growth to meet their inflation goal. That could mean a recession. Fed staff projections from June called for a “mild recession” in 2023 as the most likely case, but also with a fair chance that that economy continues to grow. Indicators such as an inverted yield curve continue to imply a recession may occur. The Fed also thinks that the “very tight” labor market is encouraging, and in fact, some softening of the labor market may be needed for inflation to ease back closer to 2%.
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Rate Hike In Play
The minutes stated that “some participants” favored a rate hike in June or could have supported one, suggesting a July hike remains likely because those not in favor of a hike were likely waiting for more incoming data on monetary policy lags and the state of the economy. It is interesting that the Fed decision was unanimous despite certain members looking to hike rates, maybe the likelihood of a July hike played into that.
It appears some officials wanted a hike, others wanted more data before making a decision. Notably, there isn’t any evidence of real consideration for lower rates yet among Fed decision makers, even though headline inflation has declined sharply. Since the June meeting, economic data has tended to support a July hike, though we do have the important July jobs report and July CPI inflation data both providing data for the month of June still to come before the Fed meets later this month.
A July Hike Seems Likely
The minutes provide further evidence that the Fed will likely raise rates in July. That’s consistent with Fed Chair Jerome Powell’s statements and public remarks from other Fed officials. It’s also the market’s view which now sees a hike in July as very likely. However, the broader point that the Fed continues to stress is that rates will remain at high levels until inflation falls to 2%. The market currently expects rates to be cut earlier than the Fed’s projections imply. There is alignment for a rate hike in July between the Fed and markets, but 2024 remains more uncertain with the Fed implying rates may stay high, whereas the market sees potential rate cuts as likely.
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