Wall Street Comments on Fed's June Meeting Minutes: Key Focus on Inflation, No Urgency for Near-Term Rate Hikes

Original author: Long Yue, Wall Street Insight

The Federal Reserve's June meeting minutes have been released, and three major Wall Street institutions have unanimously identified the same signal—inflation is the true determinant of whether interest rates will be raised.

The Fed's June FOMC meeting minutes were published on July 8th. The minutes showed that "all" participants supported maintaining the federal funds rate in the 3.5%-3.75% range. Initially, the market feared the minutes would be hawkish, but upon reading them, the general interpretation was that they were marginally dovish—for a simple reason: the minutes contained no urgency for a rate hike in the near term.

According to sources from the Zhui Feng trading desk, Goldman Sachs, Morgan Stanley, and Citigroup quickly released commentary reports after the minutes were published, and their core judgments were highly consistent: the Fed's current reaction function remains data-driven, with policy direction entirely dependent on inflation data in the coming months.

The team led by Goldman Sachs economist Jan Hatzius directly identified the core logic: The key dividing line in the minutes is whether inflation can begin to decline "soon." If it can, "almost all" officials who discussed this scenario supported "maintaining or ultimately lowering" rates; if it cannot, equally "almost all" officials who discussed the high-inflation scenario believed that "some degree of policy tightening may be necessary."

Two paths, one key: inflation data.

A "Few" Saw Reasons for a Hike, But No One Actually Wanted One

One of the most closely watched phrases in the minutes was that a "few" participants thought there were "reasons for a rate hike" at the June meeting.

However, Morgan Stanley Chief US Economist Michael Gapen explicitly pointed out that this is different from "preferring a rate hike." He wrote, "These 'few' participants indicated they are currently comfortable keeping the policy rate at its current level."

Citigroup economist Andrew Hollenhorst held a similar view. In his report, he cited the original text of the minutes, noting that these participants "said they support keeping the current target range unchanged at this meeting." In other words, even if some thought a rate hike was justified, no one was actually prepared to press that button at that time.

It is worth noting that the previous SEP dot plot showed 9 officials expecting a rate hike by 2026, with several expecting two to three hikes. However, based on the wording of the minutes, this hawkish inclination has not yet translated into a willingness to act.

Inflation: It's Not Just About the Level, But the Direction

The core logic of the minutes can be summarized in one sentence: Where inflation goes, the interest rate follows.

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

Scenario 1: Inflationary pressures ease, and inflation "soon" begins to return to the 2% target—"almost all" participants who discussed this scenario believed rates should be "maintained or ultimately lowered."

Scenario 2: Inflation remains high due to AI-related demand, Middle East conflict, or tariff factors—"almost all" participants who discussed this scenario believed that "some degree of policy tightening may be necessary."

The team reviewed the specific language of officials: Participants generally noted that both core and headline inflation had moved higher, "well above" the 2% target, primarily attributed to tariff impacts, supply chain disruptions from a Strait of Hormuz blockade, and robust demand driven by AI-related investment. "Several" officials noted that price pressures had become more broad-based, covering transportation, airfares, petrochemicals, and agricultural inputs; services inflation outside of housing "remained elevated."

However, the reason officials did not rush to act boils down to two key points:

First, inflation expectations remain consistent with the path back to the target. Second, "many" officials believe the labor market is "currently not a source of inflationary pressure." Citigroup's Hollenhorst added that the June non-farm payroll data came in below expectations, and the previous month's data was revised down, further easing concerns about the labor market reigniting inflation. This implies that the current high inflation is seen by officials more as the result of supply-side shocks rather than runaway demand.

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

Gapen used the word "soon" to define the Fed's patience boundary—he believes this likely means "the coming months," specifically the next 3 to 4 inflation data releases. If inflation dissipates and supply-side pressures appear transitory, staying put is the correct answer.

This is Not a "Regime Change"; It's Still Data-Driven

Some market participants worry that new Fed Chair Warsh might push for a fundamental shift in the monetary policy framework—moving away from "watching the data" towards proactive tightening to lower inflation more quickly.

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

The logic is: If inflation subsides, the Fed holds steady and opens the door for future easing; if inflation persists, the Fed might reverse some or all of the rate cuts implemented last year for risk management purposes. "This shows that data remains important and the Committee is uncertain about the inflation path," Gapen wrote.

In terms of communication strategy, the format of the minutes was largely consistent with previous meetings, retaining forward-looking language, scenario analysis, and descriptive terms like "few," "some," and "most." Morgan Stanley noted that while there was prior market concern that Chair Warsh might significantly reduce the information content of the minutes, "the new minutes look very similar to the old ones."

The Three Institutions' Forecasts: No Hike This Year, Rate Cuts to Wait Until 2027

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

Morgan Stanley expects that if inflation subsides as it predicts, the Fed will keep rates unchanged this year, followed by two 25 basis point rate cuts in 2027 or later. Gapen believes there is insufficient data support for a July hike, but if inflation overshoots expectations, a September hike is "theoretically possible."

Goldman Sachs forecasts that core PCE will fall to 3.0% year-over-year by the end of 2026 (from the current 3.4%), and core CPI will fall to 2.6% (from the current 2.9%), with monthly readings remaining moderate in the coming months. The baseline scenario is for rates to remain unchanged throughout 2026, but they acknowledge some risk of a rate hike.

Citigroup has the most dovish assessment. Hollenhorst believes the market's pricing for a July hike is "too hawkish relative to the Fed's reaction function." He expects 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 two 25 basis point cuts in October and December of this year, followed by another 25 basis point cut in January 2027.