Fed: Divergent inflation paths shape rate outlook – Societe Generale

Societe Generale’s Jan Groen notes that the June Federal Open Market Committee (FOMC) minutes confirmed a hawkish hold, with the Summary of Economic Projections (SEP) showing an even split between members favoring unchanged or lower rates and those preferring hikes. The Fed sees inflation as too high and the labor market as durably stable, but is divided on how long elevated inflation will persist, which drives differing policy rate views.

Committee split on inflation persistence

"We had a hawkish hold at the June FOMC meeting with the June update of the SEP indicating an even split between Committee members that wanted to keep rates on hold or cut vs. members who wanted to raise rates."

"Today’s release of the minutes of that meeting did not contain any major surprises and it confirmed the hawkish undertone from the post-meeting communications."

"Where there was disagreement within the Committee, judging from the June SEP dots a 50-50 split, was on how long elevated inflation would likely last."

"Under that scenario, many participants judged higher rates were necessary."

"If we continue to see a firm core PCE inflation trend throughout the summer the likelihood of rate hikes toward the latter part of the year will rise significantly, while the more muted June jobs report has made a more immediate July rate hike less likely."