US FOMC Meeting Minutes

The manager turned first to an overview of market developments during the intermeeting period. Asset prices were affected by a number of factors, including developments related to the conflict in the Middle East, continued solid real economic data, higher inflation data, and ongoing investment in artificial intelligence (AI). Optimism around a near-term resolution of the conflict in the Middle East and the announcement of a memorandum of understanding between the U.S. and Iran pushed the oil futures curve and near-term inflation compensation materially lower relative to levels from the time of the April FOMC meeting. Expected policy rates, Treasury yields, the U.S. dollar, and domestic equity prices all rose. Regarding monetary policy expectations, the manager observed that market participants and respondents to the Open Market Desk Survey of Market Expectations (Desk survey) generally expected no change in the target range of the federal funds rate at the June FOMC meeting. Market- and survey-based measures of expected policy rates moved higher over the intermeeting period. In the Desk survey, the median of the modal paths of the federal funds rate implied no changes in the target range through the beginning of 2027 and one rate cut in the second quarter of next year. Market pricing suggested that one rate hike was priced for mid-2027, but the manager noted that these measures were likely boosted, in part, by term premiums. The manager then discussed inflation expectations. He noted that optimism around the Iran conflict pushed market-based measures of expected inflation significantly lower over the period, leaving near-term inflation expectations only moderately higher than they were before the onset of the conflict. Longer-term inflation expectations remained well anchored near the Committee's 2 percent longer-run inflation objective. Fed: Officials saw the labor market remaining stable in the near term. *FED: A FEW SAW CASE FOR RAISING RATES AT JUNE FOMC MEEETING Fed Minutes: Fed staff forecast for inflation in 2026 and 2027 was higher than in April forecast, reflecting the Middle East war and effects of AI buildout. FOMC Minutes Show 'A Few' Fed Members Wanted To Hike In June, 'Majority' Fear Higher Inflation Today's FOMC minutes will be scrutinized for further insight into policymakers' appetite for additional rate hikes and the thinking behind the Committee's hawkish shift at last month's meeting. The minutes are an account of the June 17th meeting and therefore will not reflect subsequent developments, including the softer-than-expected June nonfarm payrolls report or Chair Warsh's appearance at the ECB's Sintra Forum. Since the last FOMC meeting (June 17th), the dollar has strengthened (on the hawkishness) and gold (and bitcoin) mirrored that with sizable declines. Stocks are flat, bond yields are higher (prices down), and oil remains lower, but accelerating in the last couple of days...

The manager turned first to an overview of market developments during the intermeeting period. The conflict in the Middle East had continued to be a key factor driving asset price movements. Equity prices had more than reversed their earlier declines, while 2-year and 10-year Treasury yields rose a bit further over the intermeeting period, as did near-term inflation compensation. In foreign exchange markets, the U.S. dollar retraced some of its previous appreciation. The manager observed that the crude oil futures curve was higher than the curve prevailing at the time of the March FOMC meeting. The curve remained steeply downward sloping, consistent with investor expectations of oil prices falling considerably in coming months. The manager noted, however, that the curve's forecasting record was mixed. Next, the manager discussed the recent behavior of inflation expectations. Near-term inflation expectations, as reported in the Open Market Desk Survey of Market Expectations (Desk survey), had again moved up, though expectations for 2027 and beyond were little changed. The survey results and market-based measures of inflation compensation pointed to longer-term expectations remaining well anchored near the Committee's 2 percent longer-run inflation objective. On monetary policy expectations, the manager noted that market-implied expectations still indicated that market participants anticipated little change this year in the target range for the federal funds rate, and options prices implied around a 30 percent probability of a rate hike by the first quarter of 2027. In the Desk survey, the median of the modal paths continued to show two 25 basis point rate reductions over the next year, but respondents now expected them to occur later than in the previous survey, with rate cuts expected in the third or fourth quarter of 2026 and the first quarter of 2027. Nominal Treasury yields had risen modestly further over the intermeeting period. A model-based decomposition of changes suggested that the increase in the two-year nominal yield since the start of the conflict in the Middle East reflected a sizable increase in expected inflation, offset to some degree by a decline in the expected real interest rate, a combination consistent with the realization of an adverse supply shock. A decomposition of the 10-year yield suggested a much smaller increase in expected inflation, alongside an increase in risk premiums. Liquidity conditions in Treasury securities markets had remained favorable even at times of increased volatility. The manager next considered equity market developments. Perceived de-escalation in the Middle East conflict boosted risk sentiment over the intermeeting period, but equity price increases had also been underpinned by strong earnings expectations. After underperforming earlier in 2026, technology-sector stocks recorded the strongest price gains over the period. *FED: MANY PREFERRED REMOVING EASING BIAS FROM STATEMENT *FED: MAJORITY SAW HIKE LIKELY WARRANTED IF INFLATION PERSISTS *FED: SOME WERE CONCERNED INFLATION EXPECTATIONS COULD DE-ANCHOR FED MINUTES: OFFICIALS GENERALLY JUDGED RATE PAUSE WILL EXTEND LONGER THAN PREVIOUSLY THOUGHT Fed Minutes: Several participants indicated rate cuts would be warranted later this year in a scenario in which conflict was resolved soon, and inflation pressures dissipated. Fed Minutes: Some participants were concerned about a scenario in which elevated energy prices and tariffs could result in inflation pressures becoming embedded more broadly.