The Fed minutes set the boundaries for interest rate policy, with a roughly 40% probability of a rate hike in July; inflation becomes the key factor in determining the outcome.
2026-07-13 14:07:29
The minutes of the FOMC meeting released last week clearly outlined two scenarios for the Fed's interest rate policy this year. Officials reached a consensus on the policy path, with the only disagreement being on the inflation outlook. The subsequent policy direction will depend entirely on economic data, and the data-driven decision-making logic is becoming increasingly clear.
The core content of this meeting minutes explained why the Federal Reserve kept interest rates unchanged in June despite inflation reaching twice the target, and clarified the triggering conditions for a rate hike this year. Most participating officials proposed two hypothetical scenarios, and all officials reached a consensus on interest rate operations under different scenarios, with the only disagreement being which scenario was more likely to be implemented.
Scenario 1: Rapid improvement in inflation. If inflationary pressures subside and price growth returns to the 2% target, the Federal Reserve will maintain interest rates unchanged, or may moderately cut rates in the long term. Scenario 2: Strong inflation stickiness. If the labor market remains stable, inflation will remain high due to factors such as strong demand for AI, Middle East conflicts, and tariff policies. In this case, the Federal Reserve will moderately tighten monetary policy.
The minutes selected core PCE as the benchmark for inflation observation to avoid the interference of short-term fluctuations in energy prices. The May data already showed the disturbance in the energy item, with overall inflation at 4.1% and core inflation at 3.4%.
"Short-term improvement in inflation" is a key prerequisite for maintaining the current interest rate. Although the official timeframe for "short-term" has not been specified, it signals that core inflation must improve in the coming months. At the June meeting, officials unanimously voted to maintain the current interest rate, with only a few advocating for a rate hike. These officials may propose a rate hike as early as the July meeting, while most officials have set September or October as the policy threshold, leaving very little time for inflation to recover.
The Federal Reserve's tolerance for inflation has plummeted, and its previous patience regarding tariff transmission and supply chain recovery has vanished. If core inflation fails to improve rapidly, interest rate hikes will be on the agenda. The term "moderate tightening" is interpreted as a 25 basis point rate hike in September and December. Current interest rates are already close to neutral, and a 50 basis point hike would create significant policy constraints. Furthermore, this tightening is not intended to initiate a large-scale rate hike cycle, but rather to curb short-term overheating of inflation.
The market anticipates a 60% probability of keeping interest rates unchanged in July and a 40% probability of a rate hike. Factors supporting the decision not to raise rates include weakening tariff transmission, continued cooling of housing inflation, limited impact of energy shocks on core prices, and no signs of overheating in the labor market. However, the longer-than-expected recovery cycle of supply shocks and the greater difficulty in reducing core inflation to below 3% are the main supporting factors for a rate hike.
The Federal Reserve's officials are nearly evenly divided. The dot plot shows that nine officials support at least one rate hike this year, eight advocate maintaining the current rate, and one favors a rate cut. The Fed Chair did not submit his projections for the dot plot. It's worth noting that the dot plot was released during the period of the US-Iran memorandum signing in June and did not factor in the subsequent positive impact of falling energy prices. The core of the officials' disagreement lies in the inflation outlook, rather than policy responses.
The minutes of this FOMC meeting clearly outlined the Fed's interest rate policy framework for the year, clarifying the triggering conditions for the two scenarios and eliminating blind speculation in the market.
Going forward, simply monitoring key data such as the June CPI and PPI will allow us to continuously revise our expectations for interest rate trends. Compared to predicting the final interest rate level, understanding the logic behind the Federal Reserve's policy responses is more valuable. Given the uncertain inflation outlook, data will become the sole core factor influencing policy direction. Changes in the oil market and inflation data in the coming months will directly determine whether the Federal Reserve will begin raising interest rates.
Key points of the minutes: Two scenarios define the boundaries of interest rate policy
The core content of this meeting minutes explained why the Federal Reserve kept interest rates unchanged in June despite inflation reaching twice the target, and clarified the triggering conditions for a rate hike this year. Most participating officials proposed two hypothetical scenarios, and all officials reached a consensus on interest rate operations under different scenarios, with the only disagreement being which scenario was more likely to be implemented.
Scenario 1: Rapid improvement in inflation. If inflationary pressures subside and price growth returns to the 2% target, the Federal Reserve will maintain interest rates unchanged, or may moderately cut rates in the long term. Scenario 2: Strong inflation stickiness. If the labor market remains stable, inflation will remain high due to factors such as strong demand for AI, Middle East conflicts, and tariff policies. In this case, the Federal Reserve will moderately tighten monetary policy.
The minutes selected core PCE as the benchmark for inflation observation to avoid the interference of short-term fluctuations in energy prices. The May data already showed the disturbance in the energy item, with overall inflation at 4.1% and core inflation at 3.4%.
The policy window is tightening, and the triggering conditions for interest rate hikes are becoming clear.
"Short-term improvement in inflation" is a key prerequisite for maintaining the current interest rate. Although the official timeframe for "short-term" has not been specified, it signals that core inflation must improve in the coming months. At the June meeting, officials unanimously voted to maintain the current interest rate, with only a few advocating for a rate hike. These officials may propose a rate hike as early as the July meeting, while most officials have set September or October as the policy threshold, leaving very little time for inflation to recover.
The Federal Reserve's tolerance for inflation has plummeted, and its previous patience regarding tariff transmission and supply chain recovery has vanished. If core inflation fails to improve rapidly, interest rate hikes will be on the agenda. The term "moderate tightening" is interpreted as a 25 basis point rate hike in September and December. Current interest rates are already close to neutral, and a 50 basis point hike would create significant policy constraints. Furthermore, this tightening is not intended to initiate a large-scale rate hike cycle, but rather to curb short-term overheating of inflation.
Probability Analysis: 60% probability of interest rates remaining unchanged in July; officials' opinions are nearly evenly divided.
The market anticipates a 60% probability of keeping interest rates unchanged in July and a 40% probability of a rate hike. Factors supporting the decision not to raise rates include weakening tariff transmission, continued cooling of housing inflation, limited impact of energy shocks on core prices, and no signs of overheating in the labor market. However, the longer-than-expected recovery cycle of supply shocks and the greater difficulty in reducing core inflation to below 3% are the main supporting factors for a rate hike.
The Federal Reserve's officials are nearly evenly divided. The dot plot shows that nine officials support at least one rate hike this year, eight advocate maintaining the current rate, and one favors a rate cut. The Fed Chair did not submit his projections for the dot plot. It's worth noting that the dot plot was released during the period of the US-Iran memorandum signing in June and did not factor in the subsequent positive impact of falling energy prices. The core of the officials' disagreement lies in the inflation outlook, rather than policy responses.
Summarize
The minutes of this FOMC meeting clearly outlined the Fed's interest rate policy framework for the year, clarifying the triggering conditions for the two scenarios and eliminating blind speculation in the market.
Going forward, simply monitoring key data such as the June CPI and PPI will allow us to continuously revise our expectations for interest rate trends. Compared to predicting the final interest rate level, understanding the logic behind the Federal Reserve's policy responses is more valuable. Given the uncertain inflation outlook, data will become the sole core factor influencing policy direction. Changes in the oil market and inflation data in the coming months will directly determine whether the Federal Reserve will begin raising interest rates.
- Risk Warning and Disclaimer
- The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.
