Waller’s first FOMC minutes—can the market still dare to bet on a Fed rate cut?

TL;DR

· The June FOMC voted unanimously to keep interest rates unchanged, but some participants believed there were already reasons for rate hikes at the time.

· Kevin Warsh leans toward reducing policy guidance, and the market will rely more on inflation data and remarks from officials for pricing.

· Related underlyings: US Dollar Index, gold, US Treasuries, US equity growth sectors, inflation trades.

The minutes of the June meeting released by the Federal Reserve on July 8 show that at the June 17 meeting, the FOMC maintained the target range for the federal funds rate at 3.50%-3.75% with 12 votes in favor and 0 against, but some participants believed that by then there were already reasons to raise rates.

For the market, the focus of this meeting was not just that rates did not move. More importantly, these were the first FOMC minutes since Kevin Warsh became Chair of the Federal Reserve, revealing a tendency to reduce forward guidance, compress policy statements, and avoid making commitments in advance about the interest-rate path.

In remarks on July 6, Federal Reserve Governor Christopher Waller offered another framing. He believed that forward guidance is still a valuable tool, as it can speed up policy transmission, but that when it is used, it is more like art than science—overly strong or rigid guidance would hinder decision-making.

The divergence between the two is reflected in changes in how trades are handled. In the past, the market was accustomed to looking for an interest-rate roadmap from statements, the dot plot, and speeches by officials. Now, this “map” may become fainter, and the weights of inflation and employment data themselves will rise.

Unanimously holding rates steady; hawkish tail risks rise

The headline outcome of the June meeting was calm on the surface. Rates were unchanged, the vote was unanimous, and the statement said economic activity is expanding steadily, while inflation remains above the 2% target. Read in isolation, the market may easily interpret this as continuing to wait for a rate-cut window.

The details in the minutes changed that interpretation. The Federal Reserve said that all participants supported holding rates unchanged, but some participants believed that, given the trajectory of inflation, there were reasons during the meeting to raise the target range for interest rates.

Two things need to be distinguished here. The fact that some participants believed there were reasons to raise rates does not mean that voting members have already formed a rate-hike camp, nor does it mean that action will be taken at the next meeting. But it does indicate that, despite the unanimous decision to stand pat, the Fed’s internal tolerance for inflation has not continued to increase.

The New York Fed’s June Survey of Consumer Expectations also added pressure. One-year inflation expectations rose to 3.7%, the highest since September 2023. Three-year inflation expectations rose to 3.3%, the highest since June 2022. Five-year expectations were kept at 3.0%.

The market implication of this data set is not that rate hikes are about to quickly return, but that the rate-cut path will be harder to confirm in advance. As long as near- and mid-term inflation expectations continue to move up, the Fed will find it difficult to give the market a stable easing commitment.

Warsh and Waller are competing over how a central bank should speak

Warsh’s communication preference is clear. The minutes show that most participants want to stop repeating earlier language with a dovish tilt; most believe that shortening statements would be beneficial, and the Chair also plans to set up 5 independent task forces to review issues related to monetary policy.

This does not mean the Fed has formally abandoned forward guidance, but it shows that, at the Chair level, there is a push toward a more restrained style of communication. With fewer policy statements and fewer commitments about the future path, the Fed can retain more room to adjust if inflation or employment changes abruptly.

Waller’s stance is more like keeping a toolbox. He acknowledged that if forward guidance is too strong or too rigid, it can affect policy transmission, and in certain situations it may be better not to use it. But when used appropriately, it can still help the market understand the policy intent more quickly.

This disagreement is not really a fight over wording. Warsh is more concerned that excessive transparency could tie policy down to past commitments, while Waller is more concerned that fully reducing guidance would weaken policy transmission. The former values flexibility, and the latter values predictability.

For asset prices, these changes are very practical. The dot plot is the distribution of Federal Reserve officials’ forecasts for future interest rates; in the past, it effectively served as an illustration of an interest-rate path. If the Chair reduces roadmap-style communication, the market will have to infer the policy reaction function using more frequent price volatility.

Rising weight of data; asset reactions could be larger

In an environment with less guidance, the market’s first change is not the long-term narrative, but the magnitude of the reaction after each data release. Inflation, employment, energy prices, and officials’ on-the-spot remarks will take on more pricing functions.

In the past, a single inflation release might only adjust the timing of rate cuts. Now it may directly change the market’s assessment of whether “more rate hikes are still needed.” Rate-cut trades will still exist, but the tolerance for error for any single data point will decline.

The US dollar has relatively strong support in this environment. The reason is not that the minutes directly push up the dollar, but that, with inflation expectations rising and the tail risk of additional rate hikes being repriced, the period during which US interest rates stay high may last longer. As long as the market does not dare to consistently position for rate cuts, the dollar is less likely to lose yield-spread support.

Gold faces a tug-of-war on both sides. Inflation concerns and geopolitical risks can support safe-haven demand, but higher real rates and a stronger dollar increase the cost of holding. When the market re-discusses the possibility of rate hikes, gold’s safe-haven logic remains, and price volatility may also be amplified.

US Treasuries and growth stocks are even more sensitive to this shift. Short-end US Treasuries directly reflect the policy path, while the long end must also digest inflation expectations and fiscal supply pressures. High-valuation growth stocks are more sensitive to the discount rate—if rates stay high for longer, valuation repair may be constrained.

Inflation data determines the boundaries of rate-cut trades

It is still not possible to write the June minutes as the Federal Reserve having shifted to a consensus for rate hikes. Some participants believed there were reasons for rate hikes and are still staying at the risk-discussion stage. Warsh favors reducing guidance, and it still needs to be validated through subsequent statements, press conferences, and reviews under the policy framework.

The core variable the market will face next is whether inflation data can contain this hawkish signal. If later inflation and expectation data cool off, the discussion in the June minutes may only be temporary noise. If near- and mid-term inflation expectations continue to rise, the concerns of some participants will be more likely to enter mainstream decision-making.

The practical changes in Warsh’s communication approach will also affect the trading pace. If future statements continue to be shorter and provide less information from the dot plot and press conferences, the market will have to adapt to a Federal Reserve that relies more on data and on officials’ on-the-spot remarks.

This does not necessarily mean that the policy direction will continue to turn hawkish, but it will make it harder for rate trades to be locked in early. For investors, what needs to be guarded against in the second half may not be a sudden rate hike at any single meeting, but rather that once there are fewer roadmap signals, the market’s reaction to every piece of inflation data and every official statement will be amplified. Rate cuts can still be traded, but the safety margin no longer looks as wide as it appears under a unanimous hold.

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