The Federal Reserve's June meeting minutes reveal a more hawkish stance than expected, with officials expressing heightened concerns about persistent inflation. Morgan Stanley notes that most participants believe tariffs could lead to lasting inflation and destabilize expectations, making a rate cut unlikely this year. The Fed remains in a wait-and-see mode, emphasizing the need for more clarity.
Despite some officials considering rate cuts as "possibly appropriate," decisions are heavily reliant on inflation data. The Fed's internal worries about inflation persistence might thwart market expectations for rate cuts this year. Morgan Stanley predicts no rate cuts in 2023 but anticipates a 175 basis point reduction in 2026.
Tariffs are seen as a significant factor in inflation risk, with the current effective tariff rate estimated at 17-18%, up from 13% in June. Although some participants believe tariffs will cause a one-time price increase, most see a more prolonged impact. The rapidly changing economic policy environment, including tariffs, taxes, immigration, and regulations, complicates the Fed's policy judgments.
FOMC participants remain cautious, with a strong focus on inflation data over employment data. The Fed maintains a patient stance, with economic growth steady and unemployment low, awaiting further clarity before making rate adjustments.
