Fed minutes: Officials saw lower risk to economic outlook than in May meeting

Fed minutes: Officials saw lower risk to economic outlook than in May meeting

The Federal Open Market Committee (FOMC) held a joint meeting on June 17-18, 2025, to review monetary policy strategies and assess economic risks. The minutes of the meeting indicated that officials perceived a lower risk to the economic outlook compared to the May meeting. This shift in perception was driven by several factors, including a moderation in inflation expectations, improved labor market conditions, and a solid pace of real GDP growth.

Key points from the meeting include:

1. Inflation and Unemployment: Consumer price inflation remained elevated but was lower than at the beginning of the year. The unemployment rate continued to be low, indicating a strong labor market. Core PCE price inflation, which excludes volatile energy and food prices, was 2.6 percent in May, a slight decrease from earlier in the year.

2. Economic Growth: Real GDP was expanding at a solid pace in the second quarter, providing a positive outlook for economic growth. Market expectations for real GDP growth and personal consumption expenditures (PCE) inflation for 2025 retraced some of the moves that occurred after the April tariff announcements, although growth expectations remained materially lower.

3. Financial Market Developments: Over the intermeeting period, policy expectations and Treasury yields rose modestly, credit spreads narrowed, and equity prices increased. These developments indicated a reduction in investors' perception of downside risk to growth and upside risk to inflation. Nominal Treasury yields rose 15 to 20 basis points, reflecting market participants' fiscal concerns.

4. Monetary Policy Expectations: The median respondent's modal path for the federal funds rate in the June survey shifted higher through 2026, suggesting a more accommodative monetary policy stance. However, futures-based policy expectations beyond the next few quarters had not fully retraced the decline seen over the previous intermeeting period, indicating that perceived medium- and longer-term downside risks to growth remained larger.

5. Foreign Exchange Developments: The broad trade-weighted dollar index fell further during the intermeeting period, consistent with larger downside revisions to the U.S. growth outlook relative to other major economies. This depreciation induced increased currency hedging flows by foreign investors in U.S. assets.

The FOMC participants acknowledged the challenges of measuring and assessing risks and uncertainty but emphasized the importance of effective communication to enhance the transparency and accountability of monetary policy decisions. They also discussed potential enhancements to the Committee's communication tools, including possible changes to the Summary of Economic Projections (SEP) and a broader use of alternative scenarios.

In conclusion, the June meeting minutes highlighted a more optimistic economic outlook compared to the May meeting, with lower perceived risks to economic growth and inflation. This shift in perception was driven by a combination of economic indicators, market developments, and monetary policy expectations.

References:
[1] https://www.federalreserve.gov/monetarypolicy/fomcminutes20250618.htm