The unanimous decision to hold rates steady comes amid a narrowing margin of safety for rate cut trades.

Written by: Rhythm

TL;DR

• The June FOMC unanimously kept rates unchanged, but a minority of participants believed there were reasons to raise rates at that time.
• Kevin Warsh tends to reduce policy guidance, and the market will rely more on inflation data and official speeches for pricing.
• Related assets: Dollar index, gold, U.S. treasuries, U.S. growth stocks, inflation trades.

The minutes of the June meeting released by the Federal Reserve on July 8 show that the FOMC on June 17 voted 12 in favor and 0 against maintaining the federal funds rate target range at 3.50%-3.75%, but a minority of participants believed there were reasons for raising the target rate range considering inflation developments.

For the market, the focus of this meeting was not just that rates remained unchanged. More importantly, this was the first FOMC minutes since Kevin Warsh took over as Fed Chair, indicating a tendency to reduce forward guidance, compress the policy statement, and avoid committing early to a rate path.

Federal Reserve Governor Christopher Waller provided a different perspective in his speech on July 6. He believes that forward guidance remains a valuable tool for accelerating policy transmission but is more an art than a science; overly strong or rigid guidance can hinder decision-making.

The disagreement between the two sides corresponds to a change in trading habits. The market used to look for a roadmap for interest rates from statements, dot plots, and official speeches. Now, this roadmap may become less pronounced, and the weighting of inflation and employment data themselves will increase.

Unanimous decision to maintain rates raises hawkish tail risks

The outward result of the June meeting was very calm. Rates remained unchanged, the voting was unanimous, and the statement said economic activity is robustly expanding, and inflation is still above the 2% target. Just looking at this information, the market might easily interpret it as a continued wait for the rate cut window.

The details in the minutes changed this judgment. The Federal Reserve stated that all participants supported the decision to keep rates steady, but a minority believed that, considering the inflation developments, there were reasons to raise the target rate range during the meeting.

It is important to distinguish two things here. A minority of participants believing there are reasons for a rate hike does not imply that the voting committee has formed a hawkish camp, nor does it mean that actions will be taken in the next meeting. However, it indicates that despite the unanimous decision to hold rates steady, the Federal Reserve's tolerance for inflation has not continued to rise.

The New York Fed's June consumer expectations survey has also intensified this pressure. One-year inflation expectations rose to 3.7%, the highest since September 2023. Three-year inflation expectations rose to 3.3%, the highest since June 2022. Five-year expectations remained at 3.0%.

The market significance of this set of data does not lie in an immediate return to rate hikes but in the increased difficulty of confirming the rate cut path ahead of time. As long as short to medium-term inflation expectations continue to rise, it will be challenging for the Federal Reserve to provide a stable commitment to easing to the market.

Warsh and Waller are debating how the central bank communicates

Warsh's communication tendencies are clear. The minutes show that most participants prefer not to repeat previous dovish statements, and most believe that shortening the statement is beneficial. The chair also plans to establish five independent task forces to review monetary policy-related issues.

This does not mean that the Federal Reserve has formally abandoned forward guidance, but it indicates that the chair's level is promoting a more restrained way of communicating. By saying less in policy statements and committing less to future paths, the Federal Reserve can retain greater adjustment space when inflation or employment changes suddenly.

Waller's position is more like keeping a toolbox. He acknowledges that overly strong or rigid forward guidance can affect policy transmission and that it may be best not to use it in certain situations. However, when used correctly, it can still help the market understand policy intentions more quickly.

This disagreement is not a matter of wording. Warsh is more concerned that excessive transparency may tie policies to past commitments, while Waller is more worried that completely reducing guidance could weaken policy transmission. The former values flexibility, while the latter values predictability.

For asset prices, this change is very practical. The dot plot represents the distribution of Federal Reserve officials' forecasts for future rates, which previously served as a roadmap for interest rates. If the chair reduces roadmap-style communication, the market will need to use more frequent price fluctuations to infer the policy response function.

Data importance rises, asset reactions may be larger

In an environment with less guidance, the first change in the market is not the long-term narrative but the amplitude of responses after each data release. Inflation, employment, energy prices, and officials' on-the-spot speeches will bear more pricing function.

In the past, a single inflation data point might have merely adjusted the timing of a rate cut. Now it might directly change the market's judgment on "whether more rate hikes are needed." Rate cut trades still exist, but their tolerance for individual data points will decrease.

The dollar has relative support in this environment. The reason is not that the minutes directly pushed up the dollar, but that in the context of rising inflation expectations and repriced hawkish tail risks, U.S. rates may remain high for a longer time. As long as the market is unwilling to firmly bet on rate cuts, the dollar is unlikely to lose its carry trade support.

Gold faces a dual pull. Inflation concerns and geopolitical risks can support safe-haven demand, but real rates and a stronger dollar will increase holding costs. When the market discusses the possibility of rate hikes again, gold's safe-haven logic remains, and price volatility may also be amplified.

U.S. treasuries and growth stocks are more sensitive to these changes. Short-end treasuries directly reflect the policy path, while long-end ones also absorb inflation expectations and fiscal supply pressures. Highly valued growth stocks are more sensitive to discount rates, and if high rates persist longer, valuation recovery will be restricted.

Inflation data determines the boundaries of rate cut trades

It is still premature to write the June minutes as a consensus shift toward rate hikes by the Federal Reserve. A minority of participants believing there are reasons for a rate hike remains at the risk discussion level. Warsh's inclination to reduce guidance still needs validation through subsequent statements, press conferences, and policy framework reviews.

The核心 variable the market will face next is whether inflation data can suppress this hawkish clue. If subsequent inflation and expectation data recede, the discussions in the June minutes may just be temporary noise. If short to medium-term inflation expectations continue to rise, the worries of the minority of participants will more easily enter mainstream decision-making.

The practical changes in Warsh's communication style will also affect trading rhythm. If future statements continue to shorten, and the information from dot plots and press conferences decreases, the market will have to adapt to a Federal Reserve that relies more on data and on-the-spot speeches.

This does not necessarily represent a sustained hawkish bias in policy direction, but it will make it harder to lock in rate trades ahead of time. For investors, in the second half of the year, the threat may not be a sudden rate hike at a particular meeting, but rather the reaction of asset prices to each inflation data release and each official statement being amplified once the roadmap is less clear. Rate cuts are still tradable, but the margin of safety no longer appears as wide under a unanimous decision to maintain rates.