The Federal Reserve's FOMC meeting minutes released last week clearly delineated two primary scenarios for the central bank's interest rate policy this year. Officials reached a consensus on the operational policy path, with disagreements limited to the inflation outlook. Future policy direction will be entirely data-dependent, making the data-driven decision-making logic increasingly evident.

Core Message of the Minutes: Dual Scenarios Define Policy Boundaries

The most crucial element of these minutes is the explanation for the Fed's decision to hold rates steady in June despite inflation running at double the target, along with the clarification of the conditions that would trigger a rate hike this year. Most participating officials proposed two hypothetical scenarios. All officials agreed on the appropriate rate action under each scenario, with the divergence lying only in which scenario is more likely to materialize.

Scenario one involves rapid improvement in inflation. If inflationary pressures subside and price growth returns to the 2% target, the Fed will maintain the current interest rate, with the possibility of modest rate cuts in the future. Scenario two assumes persistent inflation. If the labor market remains stable and inflation stays elevated due to factors like strong AI demand, Middle East conflicts, and tariff policies, the Fed will implement a moderate tightening of monetary policy.

The minutes selected core PCE as the benchmark for inflation observation to avoid interference from short-term energy price volatility. May data already showed disturbances from the energy component, with overall inflation at 4.1% and core inflation at 3.4%.

Policy Window Narrows, Hike Triggers Clearly Defined

"Short-term improvement in inflation" is the key prerequisite for keeping rates on hold. While officials did not explicitly define the "short-term" timeframe, they signaled that core inflation must show improvement in the coming months. At the June meeting, officials unanimously voted to hold rates, with only a minority advocating for a hike. These officials might propose a hike as early as the July meeting, while the majority view September or October as critical policy decision points, leaving very limited time for inflation to correct.

The Fed's tolerance for inflation has reached a low point. Patience previously shown regarding tariff pass-through and supply chain recovery has diminished. If core inflation does not improve swiftly, rate hikes will be placed on the agenda. The term "moderate tightening" is interpreted as a 25 basis point hike each in September and December. With current rates already near neutral levels, a 50 basis point increase could impose significant policy restraint. This tightening cycle is not the start of a major hiking spree but rather a measure to curb short-term inflationary overheating.

Probability Assessment: 60% Chance of July Hold, Officials Nearly Split

Market projections indicate a 60% probability of the Fed holding rates steady in July, with a 40% chance of a hike. Factors supporting a hold include weakening tariff pass-through, continued cooling in housing inflation, limited impact of energy shocks on core prices, and no signs of labor market overheating. Conversely, factors supporting a hike include a longer-than-expected supply shock recovery cycle and the significant difficulty of pushing core inflation below 3%.

Internal views among Fed officials are nearly evenly split. The dot plot shows nine officials supporting at least one rate hike this year, eight favoring holding rates steady, and one leaning towards a rate cut. The Fed Chair did not submit a dot plot projection. Notably, the dot plot was released during the period of the US-Iran memorandum signing in June and did not incorporate the subsequent favorable impact of falling energy prices. The core disagreement among officials lies in the inflation outlook, not in the policy response plan.

Conclusion

These FOMC meeting minutes clearly outline the framework for the Fed's interest rate policy this year. The two scenarios define the policy triggers, eliminating market speculation.

Moving forward, closely monitoring core data such as June CPI and PPI will allow for continuous adjustment of interest rate path expectations. Compared to predicting the final rate level, understanding the Fed's policy reaction logic holds greater reference value. Against the backdrop of an uncertain inflation outlook, data will be the sole core determinant of policy direction. Changes in oil markets and inflation data over the next few months will directly dictate whether the Fed initiates a rate hike cycle.