The FOMC minutes for the June meeting maintained a dovish tone, paving the way for a Fed funds rate cut later this month. The member generally acknowledged downside risks to growth have intensified while heightened uncertainty, in particular in trade tensions, would pose negative impacts on business investment. Fed’s monetary stance has moved to “risk management” with “several” of them believing a rate cut should be implemented to “cushion the effects of possible future adverse shocks”.

The members were very much concerned that uncertainty in trade tensions and global economic slowdown would weaken business investment. As noted in the minutes, “there were signs of weakness in US business spending”. Moreover, “uncertainties and risks regarding the global outlook appeared to be contributing to deterioration in risk sentiment in financial markets and a decline in business confidence that pointed to a weaker outlook for business investment in the United States”. They generally acknowledged downside risks to growth have intensified since the last meeting. “Many” of the voting members judged that “additional monetary policy accommodation would be warranted in the near term” if such developments “prove to be sustained” and “continue to weigh on the economic outlook”.

At the June meeting, FOMC left the policy rate unchanged at 2.25-2.50% but St Louis Fed President James Bullard, a dove, voted against the decision. Meanwhile, the dot plot projections show that more members are in favor of lowering interest rates. While the median dot plot remained unchanged for this year, 8 members indeed favored a rate cut. For 2020, the median dot plot shows that the policy rate might lower to 2.1%, compared with 2.6% projected in March. There has been a narrow majority (9 members) favoring rate cut. For 2021, the median dot plot projects that policy rate would increase to 2.4%, compared with 2.6% projected in March. The downward shift in the dot plot was mainly driven by subdued inflation, which could deteriorate further without easing.

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Regarding the minor changes in economic projections despite rising uncertainty and downside risks, the members suggested that was based on market expectations of a rate cut which is expected to lend support to the economy. As noted in the minutes, the current financial conditions are “premised importantly on expectations that the Federal Reserve would ease policy in the near term to help offset the drag on economic growth stemming from uncertainties about the global outlook and other downside risks”. We believe this has presented a strong case for rate cut in July. With the market almost priced in a cut, another month of disappointment (the Fed left rate unchanged in June) could result in abrupt deterioration in the financial market conditions.

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