On Wednesday, July 5th, the US Federal Reserve released the minutes of its June 13-14 meeting and markets did not shy away from reacting to what was revealed. So what are the Fed minutes exactly, why are they important, and how can they affect the economy and the markets? Here’s what you need to know about the Fed’s FOMC June meeting minutes and what it revealed about the trajectory of the world’s biggest economy:
What Are the Fed Minutes?
The Federal Open Market Committee (FOMC) meets on a monthly basis to set rates and conduct monetary policy. Three weeks after each FOMC meeting, a summary and overview of the discussions held by Fed members in that meeting get published. This overview is called the Fed “minutes.”
In addition to providing an overview, the minutes are deemed important in light of the fact that they can offer an outline for any upcoming FOMC meetings and decisions and can also provide valuable insight into the rationale behind the Fed’s decisions, what members think, and what might happen next.
Accordingly, this report can become a valuable tool for traders, consumers, or analysts alike and can sometimes create volatility across various markets depending on what it reveals. The latest FOMC meeting was published on July 5th and revealed the details of the FOMC’s June 2023 meeting. (Source:The Federal Reserve)
What Was Revealed in June 2023’s Meeting Minutes?
Among some of the details that were uncovered in the minutes is the fact that despite the Fed deciding to keep its rates steady in their June 13-14 meeting, some Fed officials felt that a hike was actually warranted.
This internal split happened because those who were in favor of more hikes felt that the US labor market was strong enough and that the economy was strengthening. On the other hand, other Fed members felt that taking a pause would be the better option in order to assess the effects and efficiency of the prior consecutive hikes taken by the Fed. Those in favor of a hike also mentioned that they felt that the full effect of the prior rate raises is yet to be seen.
One analyst commented that “the participants favoring a 25 basis point increase noted that the labor market remained very tight, momentum in economic activity had been stronger than earlier anticipated, and there were few clear signs that inflation was on a path to return to the committee’s 2 percent objective over time,” but ended up pausing hikes in the end.
Nonetheless, despite the latest pause, the minutes revealed that most Fed members expect further hikes in the coming months, which only highlights the Fed’s hawkishness when tackling inflation. Moreover, the minutes indicated that inflation may still pose a concern to the vast majority of the Fed officials as most of them believe that it is still well above the Fed’s 2% target. (Source:CNBC)
This may have not come as a surprise to some given the fact that Fed Chair Jerome Powell had already stated last week that the idea of more consecutive rate hikes is “not off the table” and that he feels that inflation is still stubbornly high and is far from the Fed’s 2% target rate.
It may also be worth noting that the minutes showed that many members predict a mild recession later this year and a slight decline in real GDP growth in the US. But despite this gloomy revelation, the Fed also noted that this will be followed by a gradual improvement.
Accordingly, this ambivalent outlook may only highlight the uncertainty that may be looming larger for policymakers and consumers alike.
What’s Next for the World’s Biggest Economy?
While the Fed certainly made it clear that it will keep hiking interest rates in the months to come, it is yet to be seen when these hikes will happen. With key economic data like Friday’s US NFPs report on the horizon, whether the Fed will hike rates in their next meeting or the one following it is still undetermined.
This is because some analysts believe that the US labor market will likely show signs of a slight recovery. Therefore, if these predictions hold true, this can directly affect the Fed’s monetary policy and can lead to slightly less hawkish hikes.
In addition to the labor market, the Fed members may also focus on consumer demand which showed a decline in the past few months. However, in the months to come, several factors are anticipated to place additional burdens on consumers, including the restart of student loan payments and the Supreme Court's blockage of President Joe Biden's student loan forgiveness program.
Another factor that may influence the Fed’s decisions is the fact that US citizens are depleting their savings while simultaneously accumulating debt, which suggests that US consumers may reach a point where they exhaust their resources.
Markets React to the Fed’s Hawkishness
Following the FOMC minutes release which highlighted the Fed’s hawkishness on the one hand and their decision to pause rates in June, on the other hand, Asia-Pacific markets slid sharply. As such, leading Asian indices, the Hong Kong 50 (HSI), the Japan 225 (NIY), and the China A50 (CN) slid by 2.9%, 1.7%, and 1% respectively as of the time of the writing on July 7th.
As for the US markets, following the minutes' release, Wall Street indices like the Dow Jones Industrial Average (USA 30- Wall Street), the S&P 500 (USA 500), and the tech-heavy Nasdaq (US-TECH 100) slid by 0.3%, 0.2%, and 0.1% respectively on Wednesday as investors digested the minutes' findings. All in all, despite the Fed’s hawkishness, it is important to keep in mind that nothing is certain yet and that many factors can come into play before their next meeting. Therefore, ahead of the Fed’s upcoming meeting on July 25-26, traders, investors, and consumers may want to keep track of this Friday’s US NFPs data and other substantial economic releases or advancements in order to see how these may affect the central bank’s monetary policymaking process in the coming months.