ATFX: Fed Meeting Minutes! A certain degree of policy tightening is needed
ATFX Market Review: Regarding the timing of the Fed's first interest rate hike, one basis is FedWatch, which shows a 51.5% probability of a Fed rate hike in September, higher than the 46.9% and 38% in October and December; another basis is the dot plot, which, according to the Fed's June interest rate decision materials, indicates a higher probability of a 25 basis point hike before the year-end.
The third basis is the Fed meeting minutes. At 2:00 Beijing time today, the Fed released the latest meeting minutes, corresponding to the interest rate decision from June 17 to 28. The minutes mentioned: "Almost all of these participants indicated that some degree of policy tightening may be needed to bring inflation back down to 2%." From this point of view, the expectation of a long-term Fed rate hike has strengthened, but the specific month for the hike remains uncertain.
The minutes also mentioned: "The median of the modal path for the federal funds rate shows the target range remaining unchanged through early 2027, with one rate cut implemented in the second quarter of next year." This statement's prediction for the timing of the first rate hike differs from the other two bases; it does not discuss the timing of the first hike but emphasizes the possibility of one rate cut in the second quarter of next year.
Figure 1, The Fed's Interest Rate Curve Over the Past Decade - ATFX
The Fed's monetary policy is continuous. After a rate hike at the end of the year, the probability of another rate cut in the second quarter of the following year is low. As shown in the figure above, once a rate hike cycle begins, it typically lasts two years at most, or one year and four months at least, and it almost never involves a single hike followed by a rapid cut. Considering the recurring conflicts between the US and Iran and the volatile international oil prices, the Fed might also adjust interest rates in the short term. However, the probability of such a scenario remains low.
1. Regarding inflation, the minutes mentioned: Inflation remains elevated and is moving further up.
Figure 2, US Core PCE Price Index Year-over-Year Bar Chart - ATFX
The year-over-year PCE price index has risen for four consecutive months, with the latest value at 3.4%, far exceeding the 2% target. If not for the Fed's judgment that the inflation increase is due to short-term factors (tariffs, US-Iran conflict), the Fed might have already started the rate hike process. Changes in international oil prices are the core driver behind the rise in US PCE data over the past four months. Assessing the US inflation outlook has essentially evolved into assessing the prospects of the US-Iran situation. Most Fed members do not believe the 3.75% interest rate cap is restrictive, creating an opportunity for inflation to continue rising.
2. Regarding employment, the minutes mentioned: Nonfarm payroll growth has picked up this year, and the pace is roughly in line with potential labor force growth.
The job market is impacted by the development of the AI industry, especially in terms of replacing basic positions. However, AI technology can improve production efficiency and reduce business operating costs, thereby creating downward pressure on inflation. Overall, the development of AI technology has the effect of "lowering inflation and increasing unemployment" on the macroeconomy. However, this meeting's minutes did not discuss much about AI's impact on the labor market. Members are more concerned that US-Iran conflicts or Donald Trump's policies could dampen business confidence, slow macroeconomic growth, and lead companies to reduce hiring or start layoffs.
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