The minutes of the Federal Open Market Committee (FOMC) meeting for June released last night revealed that “some” Fed officials actually see a solid basis for raising interest rates, although they ultimately agreed to keep the US rate on hold for the time being.
The first meeting under the leadership of new Chairman, Kevin Warsh, saw a unanimous decision to set the benchmark interest rate at a range of 3.5% to 3.75%. However, despite the decision to hold, concerns about inflation are found to be increasing!
Fed Members’ Forecast Breakdown: Market Now Split
The latest interest rate projections (dot plot) show that policymakers are now divided into two groups:
Hawkish group: Expect at least one interest rate hike (0.25%) this year, with 6 of them wanting at least two rate hikes.
Dovish/Neutral: Expect no change in interest rates or want a rate cut.
Trader's Note: New Fed Chairman Kevin Warsh, known as a staunch critic of the forward guidance forecasting system, chose not to send any personal forecasts. This shows that he wants the market to focus more on current economic data (data dependent) than empty promises.
Two Future Scenarios: Between AI, Iran War, and 4.1% Inflation
The meeting minutes reveal that the Fed is preparing for two economic scenarios:
Dodgy Scenario: If inflation declines, the Fed will maintain or cut interest rates.
Aggressive Scenario (Policy Firming): If inflation remains sluggish due to high demand from the AI sector, soaring energy prices, and tariff issues, most members agree that raising interest rates is warranted.
The hawkish group's concerns were supported by data a week after the meeting, where the Personal Consumption Expenditures (PCE) Price Index, the Fed's favorite inflation indicator, jumped 4.1% in May (the highest increase since April 2023) due to the impact of the Iran war on oil prices. In fact, core inflation (Core PCE) also jumped 3.4%.
The inflation situation worsened this week after President Donald Trump declared the US-Iran ceasefire plan was over, sending crude prices soaring again.
Two Sacred Dates That Traders Must 'Mark' On Their Calendars:
As of early Wednesday, investors and traders had begun betting that the Fed would raise interest rates one to two times by 25 basis points this year. All eyes are now on July 14, 2026 as these two mega events will occur simultaneously:
June CPI Data Released: Markets will see to what extent non-energy inflation is starting to spread into the US economy.
Kevin Warsh's First Testimony: The new Fed chairman will appear before the US House of Representatives Financial Services Committee to give his first testimony since being sworn in on May 22.
New Era of the Fed: Short Script, Less Chatter
Another innovation brought by Kevin Warsh is that the June FOMC statement was found to be much shorter than before. The meeting minutes confirmed that a large number of Fed officials agreed that it was time to change the central bank's communication strategy from making less promises about the future, and more data-based action. However, the Fed remained optimistic that US GDP growth will remain solid through the rest of 2026 with a stable labor market.
The meeting minutes this time are clearly hawkish. This sentiment provides additional tonic for the US Dollar (USD) to continue strengthening, while high-risk assets and gold may have to accept the pressure if the CPI data on July 14 comes out higher than expected.
We expect the market to move very aggressively (volatile) by mid-July. The best trading setup is to watch Kevin Warsh's first statement to Congress to read the true 'heart' of the new Fed chairman.
Do you think Kevin Warsh will continue to 'stun' the market by raising interest rates at the next meeting, or will he maintain Trump's policy of wanting low interest rates? Drop a comment below!
