FOMC Minutes Reveal Board's Divide: Majority Supports Further Rate Increases

The once-solid consensus among Federal Reserve members regarding the ongoing rate hike campaign initiated in March 2022 is now showing signs of fragmentation within the board.

Recent insights gleaned from the minutes of the latest Federal Open Market Committee meeting held on July 25-26 underscore the emergence of uncertainty about the future trajectory of interest rates.

July’s FOMC Minutes: Key Takeaways

Most participants continued to see “significant upside risks to inflation, which could require further tightening of monetary policy,” the minutes stated.
A couple of participants in the broader panel indicated that they favored leaving the target range for the federal funds rate unchanged or that they could have supported such a proposal. However, the FOMC’s vote to raise fed funds by 0.25% to 5.25%-5.5% in July was unanimous.

Some participants noted downside risks to economic activity and upside risks to the unemployment rate, adding that the effects of the tightening in financial conditions since the beginning of last year could prove more substantial than anticipated.

A number of participants said that with restrictive monetary policy, risks to achieving the Committee’s goals have become more balanced, warning of accidentally tightening policy too much.

On the inflation front, members noted that the core Personal Consumption Expenditures (PCE) price inflation — widely regarded as the Fed’s favored gauge for inflation — remained elevated in May, and
available information suggested that inflation declined but remained elevated in June.

Discussions regarding the labor market acknowledged tight conditions in recent months, though the
imbalance between demand and supply in the labor market was gradually diminishing.

Market Reactions: Stocks, Dollar Make U-Turns

Prior to the FOMC minutes release, the market had anticipated a high probability of around 90% for the Fed to maintain rates in September. Similarly, the likelihood of this stance continuing into November was at 65%.

After the release of the minutes, traders slightly revised higher chances for a rate hike by the November meeting, leading to an implied probability of 39%, up from 35%.

The SPDR S&P 500 ETF Trust SPY initially experienced a 0.3% decline but managed to recover losses by the time of this report. The Invesco QQQ Trust QQQ followed a similar pattern.

Conversely, the U.S. dollar index, monitored via the Invesco DB USD Index Bullish Fund ETF UUP, displayed an upward 0.2% spike followed by a subsequent decline.