Federal Reserve June Meeting Minutes: Internal Divisions Widen, No Consensus on Timing and Magnitude of Rate Cuts

According to the Zhitong Finance APP, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) meeting held on June 17-18, 2025, on July 9. Although the meeting unanimously decided to maintain the federal funds rate target range at 4.25% to 4.5%, the minutes revealed an increasing divergence within the Federal Reserve regarding the future direction of monetary policy, particularly on the issue of whether to cut interest rates within the year. The minutes indicated that against the backdrop of tariff policy adjustments, easing inflation, and a marginal weakening of the labor market, the majority of FOMC members tended to believe that "a moderate rate cut would be appropriate at some point this year." However, a minority of hawkish members insisted that current policies should not change, highlighting the increasingly complex trade-offs the Federal Reserve faces between controlling inflation and promoting economic growth. According to the economic assessment provided by staff during the meeting, the momentum of U.S. economic growth in the second quarter is recovering. The core Personal Consumption Expenditures (PCE) price index rose 2.6% year-on-year, slightly lower than the beginning of the year. The unemployment rate remained low at 4.2%, with stable non-farm employment growth, although the labor force participation rate and employment-population ratio showed slight declines. Meanwhile, consumer spending and business fixed investment remained robust, despite household and business confidence indices still being at low levels. The minutes pointed out that corporate investment shows a trend of "high at the beginning and stable later," with a surge in investment in the first quarter due to anticipated tariff increases leading to early equipment imports, while the second quarter has stabilized. In the residential real estate market, households with high credit scores can still obtain loans, with credit easing, but loan conditions for lower-scoring groups remain tight. Observations of consumer behavior show that middle- and low-income households are beginning to shift towards lower-priced brands and products, with increased sensitivity to price changes. This trend may indicate that the price upward pressure brought by tariffs will more easily transmit to vulnerable groups, thereby affecting the overall consumption structure. Unclear Tariff Impact, Cautiously Optimistic Inflation Expectations It is noteworthy that the minutes emphasized differing views on the inflation outlook. On one hand, the majority of members believe that due to several new tariffs announced by the Trump administration, some prices may face temporary upward pressure; on the other hand, some members believe that companies may alleviate cost transmission by compressing profit margins, adjusting supply chains, or delaying price adjustments, making the overall inflation effect of tariffs limited. Specifically, several members believe that the price increases triggered by tariffs may be a "one-time shock" and not sustainable; while some members warned that if price increases persist longer than expected, it could undermine the anchoring of long-term inflation expectations, especially against the backdrop of geopolitical risks in the Middle East and increased volatility in global energy prices. Regarding inflation expectations, most members believe that long-term expectations remain solid, but short-term expectations have risen, with some businesses and consumers holding cautious views on price increases in the coming months. Divergence Intensifies: Will Rate Cuts Begin Within the Year? The focus of the meeting that attracted the most market attention was the FOMC members' judgments on the future path of interest rates. The minutes showed that the "majority" of members believe that a rate cut within the year is appropriate, especially under the premise of slowing economic growth and controllable inflation pressures. Among them, a "minority" of members even expressed a willingness to cut rates at the FOMC meeting on July 29-30, suggesting that if the data meets expectations, swift action may be taken At the same time, some committee members insist that interest rates should not be lowered throughout 2025, pointing out that inflation remains above the 2% target and that the economy continues to show strong resilience in the short term. Premature easing could trigger a new round of price increases. In addition, several members noted that the current policy interest rate "may already be close to neutral levels," meaning that even if rate cuts are initiated in the future, the room for maneuver will be quite limited. Some members explicitly stated that future policy adjustments will heavily depend on data performance and the evolution of uncertainties. "Fed mouthpiece" Nick Timiraos indicated that the Federal Reserve's meeting minutes revealed some things we already knew, with officials divided into three main camps: those favoring rate cuts within the year but excluding July (the mainstream camp), those advocating for no changes throughout the year, and those calling for immediate action at the next meeting (the minutes showed that only a "few" attendees supported this, implying Fed Governor Waller and Bowman). The minutes also noted that "several participants indicated that the current target range for the federal funds rate may not be much higher than neutral levels." In other words, unless the economy significantly slows down, even if rate cuts are restarted, the subsequent room for cuts will be very limited. Financial markets operate smoothly, but fiscal risks raise concerns The meeting minutes also assessed the latest situation of financial markets and monetary policy operations. During the meeting, U.S. Treasury yields rose moderately, with short-term rates increasing in line with policy path expectations, while long-term rates rose reflecting heightened market concerns about U.S. fiscal sustainability. Moreover, despite market volatility triggered by trade policy adjustments in April, recent data shows that the market has gradually absorbed the tariff shocks, the U.S. dollar index has slightly weakened, and overall market liquidity remains good. The Federal Reserve continues to maintain liquidity support mechanisms through overnight reverse repurchase operations and repurchase operations, and has increased the frequency of morning operations since June 26 to ensure the transmission efficiency of monetary policy. Regarding the SOMA asset portfolio, since the initiation of balance sheet reduction in June 2022, total assets have decreased by $2.25 trillion. According to a trading desk survey, most market participants expect the Federal Reserve to end the balance sheet reduction by early 2026, at which point the total asset scale will be around 20% of GDP. Will the July meeting become a policy turning point? As the July FOMC meeting approaches, the market is eagerly anticipating whether the Federal Reserve will initiate its first rate cut in 2025. The minutes revealed a mainstream tendency for "appropriate rate cuts within the year," but a comprehensive consensus has yet to form. Key variables will still include: whether core inflation continues to ease; whether the labor market shows further weakness; whether the Trump administration's tariff policies continue to change; and whether the global economy experiences synchronized slowdowns. Currently, the implied expectations in the interest rate futures market show that investors are generally betting that July or September will be a policy turning point. If key data does not worsen by then, a window for moderate rate cuts may open