Wall Street comments on the Federal Reserve's June meeting minutes: Focus on inflation, no urgency for interest rate hikes in the short term

Author: Long Yue

The minutes from the Federal Reserve's June meeting have been released, and the three major institutions on Wall Street have unanimously read the same signal—inflation is the real switch determining whether to raise interest rates.

The minutes of the June FOMC meeting were published on July 8. The minutes show that "all" participants supported keeping the federal funds rate unchanged in the range of 3.5%-3.75%. Initially, the market was concerned that the minutes leaned hawkish, but after reading them, they generally interpreted them as marginally dovish—the reason is simple: there is no urgency for a rate hike in the minutes.

According to reports from the trading desk, Goldman Sachs, Morgan Stanley, and Citigroup quickly released commentary reports after the minutes were published, with a core judgment that was highly consistent: the Fed's current reaction function is still data-driven, and the direction of policy entirely depends on the inflation data performance in the coming months.

Goldman Sachs economist Jan Hatzius's team pointed out the core logic directly: the key watershed in the minutes is whether inflation can "quickly" begin to decline. If it can, "almost all" officials discussing this scenario support "maintaining or eventually lowering" interest rates; if it cannot, similarly "almost all" officials discussing the high inflation scenario believe "some degree of policy tightening may be necessary."

Two paths, one key: inflation data.

"Few" see reasons for a rate hike, but no one really wants to press the button

One of the most noteworthy phrases in the minutes is that "a few" participants believed there were "reasons for a rate hike" at the June meeting.

However, Morgan Stanley's Chief U.S. Economist Michael Gapen clearly pointed out that this is different from "leaning towards a rate hike." He wrote: "These 'few' participants indicated that they are currently satisfied with keeping the policy rate at its current level."

Citigroup economist Andrew Hollenhorst shares the same view. In his report, he quoted the original text of the minutes, stating that these participants "expressed support for maintaining the current target range at this meeting." In other words, even if some feel a rate hike makes sense, no one is really ready to press that button at this point.

It is worth noting that in the previous SEP dot plot, nine officials expected a rate hike in 2026, with several expecting 2-3 hikes. However, from the wording of the minutes, this hawkish tendency has not yet translated into a willingness to act.

Inflation: It's not just about the height, but also the direction

The core logic of the minutes can be summarized in one sentence: where inflation goes, interest rates will follow.

The Goldman Sachs team pointed out that "most" participants discussed two scenarios in the minutes:

Scenario One: Inflationary pressures ease, and inflation "quickly" returns to the 2% target—"almost all" participants discussing this scenario believe that the federal funds rate should be "maintained or ultimately lowered."

Scenario Two: Inflation remains high due to AI-related demand, Middle Eastern conflicts, or tariff factors—"almost all" participants discussing this scenario believe that "some degree of policy tightening may be necessary."

The team sorted through the specific statements of the officials: participants generally noted that core inflation and overall inflation have both risen further, "far above" the 2% target, primarily due to tariff impacts, supply chain disruptions caused by the blockade of the Strait of Hormuz, and strong demand driven by AI-related investments. "Several" officials pointed out that price pressures have become widespread, covering transportation, airfare, petrochemicals, and agricultural inputs; inflation in services outside of housing "remains elevated."

However, the reason officials have not rushed to act hinges on two points:

First, inflation expectations still align with the path back to the target. Second, "many" officials believe the labor market "is not currently a source of inflationary pressure." Hollenhorst from Citigroup added that the June non-farm payroll data was below expectations, and the previous month's data was revised down, further weakening concerns that the labor market would reignite inflation. This means that the current high level of inflation is seen by officials more as a result of supply-side shocks rather than uncontrolled demand.

Morgan Stanley's Gapen provided a specific interpretation of the phrase "some degree of policy tightening": it means "a recalibration of the policy stance," i.e., a rate hike of 50-75 basis points, rather than the start of a full rate hike cycle.

Gapen used the term "soon" to define the Fed's patience boundary—he believes this likely means "in the coming months," specifically the next 3 to 4 inflation data releases. If inflation shows signs of dissipating and supply-side pressures are temporary, holding steady is the correct answer.

This is not a "systemic change," still data-driven

Some market participants are concerned that the new Fed Chair Warsh may push for a fundamental change in the monetary policy framework—no longer "looking at data," but actively tightening to bring down inflation more quickly.

Morgan Stanley's Gapen directly responded to this: "The minutes do not point to a 'systemic change' in the Fed's reaction function." He believes that the paragraphs regarding the monetary policy outlook in the minutes remain fully within the past "data-dependent" framework.

The logic is: if inflation dissipates, the Fed will hold steady and open the door for future easing; if inflation does not retreat, the Fed may reverse some or all of the rate cuts implemented last year for risk management purposes. "This indicates that data remains important, and the committee is still uncertain about the inflation path," Gapen wrote.

In terms of communication strategy, the format of the minutes is basically consistent with previous meetings, retaining forward-looking statements, scenario analyses, and descriptive terms such as "few," "some," and "most." Morgan Stanley pointed out that there were previous market concerns that Chair Warsh might significantly reduce the amount of information in the minutes, but "the new minutes look very similar to the old minutes."

Predictions from the three institutions: no rate hikes this year, rate cuts to wait until 2027

The three institutions have slight differences in their predictions, but the direction is consistent:

Morgan Stanley predicts that if inflation declines as it forecasts, the Fed will keep rates unchanged this year, with two rate cuts of 25 basis points each in 2027 or later. Gapen believes that the data support for a rate hike in July is insufficient, but if inflation exceeds expectations, a rate hike in September "is theoretically possible."

Goldman Sachs predicts that by the end of 2026, core PCE year-on-year will drop to 3.0% (currently 3.4%), and core CPI will drop to 2.6% (currently 2.9%), with moderate month-on-month readings in the coming months. The baseline scenario is to maintain the interest rate unchanged throughout 2026, but acknowledges some risk of a rate hike.

Citigroup's judgment is the most dovish. Hollenhorst believes that the market pricing for a July rate hike is "too hawkish relative to the Fed's reaction function." He predicts that as the unemployment rate rises in the coming months, the balance within the committee will shift from rate hikes to rate cuts, with a baseline scenario of a 25 basis point cut in October and December this year, and another 25 basis points cut in January 2027.