Author: Long Yue
The June Fed meeting minutes have been released, and three major Wall Street institutions have unanimously read the same signal—inflation is the real switch that determines whether to raise rates or not.
The minutes of the June FOMC meeting were released on July 8. They showed that "all" participants supported maintaining the federal funds rate in the 3.5%-3.75% range. The market initially worried the minutes were hawkish, but after reading them, they were generally interpreted as marginally dovish—for a simple reason: no near-term urgency to hike rates could be seen in the minutes.
According to Wind Trading Desk, Goldman Sachs, Morgan Stanley, and Citigroup quickly released commentary reports after the minutes were published, with their core judgments highly consistent: the Fed's current reaction function remains data-driven, and the policy direction depends entirely on the performance of inflation data in the coming months.
Goldman Sachs economist Jan Hatzius's team directly pointed out the core logic: the key watershed in the minutes is whether inflation can start to fall back "fairly soon." If it can, "almost all" officials discussing this scenario supported "maintaining or ultimately reducing" the rate; if not, similarly "almost all" officials discussing the high inflation scenario believed "some additional policy firming may be appropriate."
Two paths, one key: inflation data.
"A Couple" Saw Reasons to Hike, But No One Actually Wanted To
One of the most scrutinized phrases in the minutes was that "a couple" of participants saw grounds to raise the target range at the June meeting.
But Morgan Stanley's chief US economist, Michael Gapen, clearly stated that this is not the same as "leaning toward a hike." He wrote: "These 'couple' of participants indicated that they currently were comfortable with maintaining the policy rate at its present level."
Citigroup economist Andrew Hollenhorst held the same view. He pointed out in his report, citing the minutes, that these participants "indicated that they supported maintaining the current target range at this meeting." In other words, even if some thought there were reasons for a hike, no one was actually ready to press that button at this point.
It is worth noting that in the previous SEP dot plot, nine officials projected rate hikes in 2026, with several of them expecting 2-3 hikes. But judging from the wording of the minutes, this hawkish inclination has not yet translated into a willingness to act.
Inflation: Not Just About the Level, But the Direction
The core logic of the minutes can be summarized in one sentence: where inflation goes, interest rates will follow.
The Goldman Sachs team noted that "most" participants in the minutes discussed two scenarios:
Scenario One: Inflationary pressures abate, and inflation begins to move back toward the 2% objective "fairly soon"—"almost all" participants discussing this scenario judged that the federal funds rate should be "maintained or ultimately reduced."
Scenario Two: Inflation remains persistently high due to factors such as AI-related demand, Middle East conflicts, or tariffs—"almost all" participants discussing this scenario judged that "some additional policy firming may be appropriate."
The team summarized the officials' specific statements: Participants generally noted that both core and overall inflation had moved up further, "well above" the 2% objective, attributing this primarily to the effects of tariffs, supply chain disruptions from the Strait of Hormuz blockade, and strong demand driven by AI-related investment. "Several" officials pointed out that price pressures had broadened, covering transportation, airfares, petrochemicals, and agricultural inputs; inflation in services excluding housing "remained elevated."
But the reasons officials were not rushing to act came down to two key points:
First, inflation expectations remained consistent with a path back to target. Second, "many" participants saw the labor market as "currently not a source of inflationary pressures." Citigroup's Hollenhorst added that the lower-than-expected June nonfarm payrolls number and the downward revision of the previous month's data further alleviated concerns about the labor market reigniting inflation. This suggests that the current elevated inflation is seen by officials more as a result of supply-side shocks rather than runaway demand.
Morgan Stanley's Gapen provided a specific interpretation of the phrase "some additional policy firming": it implies a "recalibration of the policy stance," meaning rate hikes of 50-75 basis points, rather than the start of a full-fledged hiking cycle.
Gapen used "fairly soon" to define the boundary of the Fed's patience—they believe this likely means "the next few months," specifically perhaps the next 3 to 4 inflation readings. If signs emerge that inflation is dissipating and supply-side pressures are transitory, staying put is the right course of action.
This is Not a "Regime Change," It's Still Data-Dependent
Some market participants have worried that the new Fed Chair, Warsh, might drive a fundamental shift in the monetary policy framework—moving away from being "data-dependent" to actively tightening to bring inflation down faster.
Morgan Stanley's Gapen responded directly to this: "The minutes do not point to a 'regime change' in the Fed's reaction function." He believes the paragraphs in the minutes regarding the monetary policy outlook remain entirely within the past "data-dependent" framework.
The logic is: If inflation abates, the Fed stays put, opening 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 suggests that data still matter and that the Committee remains uncertain about the inflation path," Gapen wrote.
In terms of communication strategy, the format of the minutes remains largely consistent with previous meetings, still retaining forward-looking statements, scenario analysis, and descriptive terms like "a couple," "some," and "most." Morgan Stanley noted that the market had previously worried Chair Warsh might significantly reduce the information content of the minutes, but "the new minutes look very similar to the old ones."
Forecasts from the Three Institutions: No Hike This Year, Cuts Wait Until 2027
The three institutions have slight differences in their forecasts, but the direction is consistent:
Morgan Stanley expects that if inflation subsides as they forecast, the Fed will keep rates unchanged this year and cut twice, 25 basis points each, in 2027 or later. Gapen believes there is insufficient data support for a July hike, but if inflation exceeds expectations, a September hike is "theoretically possible."
Goldman Sachs expects core PCE year-on-year to fall to 3.0% (currently 3.4%) and core CPI to 2.6% (currently 2.9%) by the end of 2026, with monthly readings remaining moderate in the coming months. Their baseline scenario is for rates to remain unchanged throughout 2026, but they acknowledge some risk of hikes.
Citigroup has the most dovish call. 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 Committee's internal balance will shift from hiking to cutting, with a baseline scenario of 25 basis point cuts each in October and December of this year, followed by another 25 basis point cut in January 2027.
