FOMC Minutes: Hawkish tone confirmed. EURUSD rebounds nonetheless

Key takeaways from the June FOMC "minutes":

• Rate decision: All Fed officials supported the June decision to leave interest rates unchanged.
• Risk of returning to hikes: Almost all committee members noted that if elevated inflation persists, further "policy firming" would likely be warranted.
• New pro-inflationary factors: Most participants pointed to scenarios where inflation remains high due to demand related to the development of artificial intelligence (AI), the conflict in the Middle East, and tariffs. For this reason, Fed members decided to raise inflation forecasts for 2026 and 2027 compared to March.
• Inflation expectations: Most policymakers see a high risk that prolonged inflation could negatively affect consumers' inflation expectations (their "unanchoring").
• Change in stance (removal of "easing bias"): Most members favored removing language from the previous statement that suggested a bias toward monetary easing (rate cuts).
• New communication: A vast majority see benefits in shortening the FOMC statement. It was agreed that the statement should directly communicate the commitment to the so-called dual mandate, with particular emphasis on restoring price stability.
• State of the economy: Fed staff slightly lowered GDP growth forecasts compared to April, however, policymakers assess that the labor market will remain stable in the near term.

Is the tone of the minutes and the June meeting itself actually hawkish? Yes, it can be stated that the tone of the conversation records is clearly hawkish, but we do not have a clear declaration that a rate hike is needed right at this moment, which might have calmed the market slightly. It is also worth remembering that the Fed meeting took place when the overall sentiment was very pro-hike, and the new Fed chief, Kevin Warsh, softened his stance slightly during the recent economic symposium in Sintra.

Nevertheless, dropping the phrasing suggesting upcoming cuts ("easing bias") and the desire to shorten the communique to focus on "price stability" is a clear signal: the Fed is stopping its promises of rate cuts and toughening its stance. The central bank wants to cut off market speculation about easing. Although expectations recently emerged that the Fed might return to pricing in cuts given the drop in oil prices, the latest minutes leave no illusions.

How do members perceive inflation? FOMC members perceive current inflation as extremely persistent and driven by factors they haven't faced before. The biggest surprise here is the open identification of artificial intelligence (AI) development as a pro-inflationary factor (although for the labor market, this factor could be viewed quite differently). Demand for chips, data centers, and electricity, combined with the war in the Middle East and tariff wars, creates new price pressure. Inflation forecasts for the following years have been revised upward, showing that the Fed is preparing for a long and difficult fight, while also fearing that society will get used to high prices (unanchoring of expectations).

Is there a fear of returning to hikes? Definitely yes, and this is the most important conclusion for the markets. Although we are now seeing a rebound in EURUSD, the minutes confirm that the hawkish disposition is not only visible in Warsh. The open declaration that "almost all" policymakers are ready for policy tightening (meaning rate hikes) in the event that inflation fails to fall, completely changes the market narrative. The "minutes" show that the Fed has not only completely shed its dovish stance, but with further risks of rising inflation, pricing of a September hike might not be so terribly exaggerated. The combination of slower GDP growth but a still very stable labor market gives the Federal Reserve comfort: the economy is not yet collapsing, so there is no urgent need to save it with cuts. The Fed can thus focus 100% on extinguishing inflation, even if it were to mean another upward move in rates. However, it is worth emphasizing that such a declaration was not made and, due to reduced forward guidance, will probably not be made, leaving the market to guess what to expect from future Fed decisions.

EURUSD approaches nearly the 1.1430 level after the publication of the minutes

EURUSD tests daily highs despite the evidently hawkish tone. It is worth noting, however, that there is no clear declaration that hikes are coming, only that such a move can be expected given inflationary risks. Now everything depends on Trump and oil prices. Source: xStation5