This week's Federal Reserve Minutes add fuel to the expectations of interest rate cuts?
Citigroup expects that the upcoming Federal Reserve meeting minutes will present a dovish tone, and the Federal Reserve's "wait-and-see" period for interest rate cuts may end by late summer, with cuts anticipated to begin in September. The key support behind this is that the U.S. core PCE inflation has been below the target for three consecutive months, creating conditions for rate cuts, while several Federal Reserve officials have shifted their stance to support rate cuts
As the market holds its breath for signals of an interest rate cut from the Federal Reserve, a key document—the Minutes of the Federal Reserve meeting—is quietly rewriting expectations.
According to reports from the Chase Trading Desk, Citigroup's research report on July 7 indicates that the upcoming Minutes from the Federal Reserve's June 17-18 meeting will release more dovish signals than expected, with the "wait-and-see" period for rate cuts possibly ending by late summer.
Although Jerome Powell maintained a neutral stance during the press conference following the June interest rate decision, several Federal Reserve officials subsequently released dovish signals, leading the market to have higher expectations for rate cuts in the upcoming Minutes. Recently, the previously hawkish Federal Reserve Governor Michelle Bowman has shifted to support the possibility of a rate cut in July, and Governor Christopher Waller has also indicated he might support a rate cut in July.
Meanwhile, data shows that as of June 2025, the Federal Reserve's favorite inflation indicator—the U.S. Core PCE Price Index—has seen its year-on-year growth rate fall below the 2% target threshold for three consecutive months, making this key indicator's continued decline an important argument for the dovish forces within the Federal Reserve.
Citigroup's research report indicates that although last week's strong employment data in the U.S. has blocked the possibility of a rate cut in July, the consensus among Federal Reserve officials regarding cooling inflation is driving the process for rate cuts to potentially start in September. The bank still believes that the Federal Reserve will begin cutting rates in September and will cumulatively cut rates by 125 basis points before March next year, while also expecting the Federal Reserve's "wait-and-see" period to possibly end by late summer.
Powell seems to lean more towards a rate cut in September, suggesting that the path of interest rates will depend on the data released in June, July, and August. We expect the Minutes to include the view that the "wait-and-see" period may end by late summer—this is not a major surprise, but still somewhat dovish.
The Wall Street Journal calendar shows that the Minutes of the Federal Reserve's monetary policy meeting will be released at midnight this Thursday, Beijing time.
The cautious attitude from May needs to change
Citigroup's research report indicates that the Minutes from the Federal Reserve's May FOMC meeting noted:
When considering the outlook for monetary policy, participants unanimously agreed that, given the solid economic growth and labor market, and the current monetary policy being moderately restrictive, the Committee is in a favorable position to wait for further clarity on the inflation and economic activity outlook. Participants unanimously agreed that the uncertainty surrounding the economic outlook has increased further, and therefore it is appropriate to adopt a cautious stance until the net economic impact of a series of policy changes by the U.S. government becomes clearer.
Now, Citigroup believes that the uncertainty surrounding the economic outlook has decreased, and the wording of the May Minutes will need to be adjusted. This paragraph may be revised to:
The uncertainty surrounding the outlook has decreased, and the Committee expects to gather more data on the effects of policy during the summer. This will strengthen the view that core members of the Committee may support a rate cut in September.
Another somewhat dovish point is that at least "some" Federal Reserve officials support Chairman Powell's view that if it weren't for concerns about upcoming tariff-related inflation, the Federal Reserve should have started easing the policy rate towards neutral levels earlierIn other words, the Federal Reserve could have lowered interest rates earlier.
Hawkish Voices Still Exist but Are Not Mainstream
Despite the overall dovish tone, the minutes will reflect some officials' hawkish views. Officials like Cleveland Fed President Hammack suggested that the policy rate may remain at current levels for an extended period.
Recently, Hammack stated that the current rate is only slightly restrictive and may remain stable for some time. The Federal Reserve is "some distance" from achieving its inflation target, and official data may not reflect the latest changes, including the recent rise in oil prices.
However, Citigroup analysts expect the minutes to clearly indicate that this is not the committee's baseline scenario, with "most" Federal Reserve officials anticipating a reduction in the policy rate before the end of the year. This statement will further confirm the market's expectations for rate cuts in the second half of the year.
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