Precious Metals Talking points 082125:Fed Minutes July 2025 vs June; also the July Summary

FOMC Minutes; July vs June, and July summarry

Rhona O'Connell, Head of Market Analysis, EMEA & Asia

 Tel: +44 203 580 6115 / mobile +44 7384 833897

21 August 2025

Summary:  the Fed is close to completing its five-year review of its framework for assessments and will publish shortly.  From a market standpoint labour seen as solid with unemployment at 4.1% but June core CPE was 2.7%.  Two dissenting votes on rates (Michelle Bowman and Chris Waller); first time since 1993.

There follows a precis of the differences between June and July and then a fuller summary of July
 

1. Framework & Strategy Review

• June: Focused on uncertainty/risk assessment tools (scenario analysis, projections, communication tools).
• July: Shifted toward finalizing revisions to the long-run goals statement. More emphasis on wrapping up the framework review.

Meaning: The June meeting was exploratory, the July meeting was about consolidating and finalizing.

2. Financial Market Developments

• June: Markets reacted to tariff de-escalation, fiscal expansion prospects, and weaker data (except jobs). Yields rose modestly, dollar fell further. Repo markets were soft because of the debt ceiling suspension.
• July: Markets were calmer; policy expectations flat, equities higher, dollar depreciated slightly, repo rates nudged up due to quarter-end and TGA rebuild. SRF saw record $11B usage.

Meaning: June minutes described volatility tied to tariffs and debt limit. By July, focus shifted to quarter-end liquidity, TGA rebuild, and AI-driven equity valuations.

3. Economic Situation

• Inflation:
  • June: Headline PCE 2.3%, Core 2.6% (May). Inflation was lower than earlier in the year.
  • July: Headline PCE 2.5%, Core 2.7% (June). Inflation stalled/disinflation stopped due to tariffs.
• Labor Market:
  • June: Unemployment 4.2%, stable; wages +3.9% YoY.
  • July: Unemployment 4.1%, slightly better; wages +3.7% YoY (slower growth).
• GDP:
  • June: GDP expanding solidly in Q2 after a small Q1 decline.
  • July: GDP expanding tepidly in H1; Q2 rebound driven by net exports (sharp import drop after tariff front-loading).

Meaning: The June narrative was more positive on growth and inflation progress. By July, the tone shifted: inflation stickier, growth weaker, tariffs more prominent.

4. International Economy

• June: Emphasized tariff-driven swings (import surges then sharp declines, temporary China tariff cut). Foreign growth picked up in Q1, slowing in Q2. Many central banks eased policy.
• July: Foreign growth slowed, Canada contracted, China still moderate. Inflation abroad near targets. Some central banks eased (Mexico, Switzerland), others held steady.

Meaning: June stressed trade volatility; July pointed to broad slowing abroad.

5. Financial Stability

• June: Credit availability strong, delinquencies elevated only in weaker sectors (CRE, FHA mortgages, student loans). Risks still present but easing.
• July: Asset valuations higher, leverage concerns in hedge funds/life insurers more stressed. Stablecoins (GENIUS Act) mentioned for first time—both as opportunity and risk.

Meaning: July brought a new focus on stablecoin legislation as a systemic factor.

6. Staff Outlook

• June: Upgraded GDP outlook (tariffs assumed less severe), inflation forecast lowered, risks still skewed downside (activity) and upside (inflation).
• July: GDP forecast steady vs June, but weaker spending + lower immigration assumed. Inflation slightly lower but still tariff-driven in 2025–26. Risks: downside growth, upside inflation.

Meaning: June was cautiously more optimistic; July outlook turned more cautious again.

7. Participants’ Views

• Inflation:
  • June: Inflation had come down since 2022 but still elevated; tariffs could add pressure but maybe temporary. Uncertainty about size/duration.
  • July: Inflation “stalled,” with tariffs directly visible in goods prices. Firms adopting coping strategies (automation, supplier switching, margin compression). Concern inflation expectations could unanchor.
• Labor Market:
  • June: Solid but stable; hiring slowed, layoffs low. Some early signs of softening.
  • July: Similar but more emphasis on concentrated job growth and youth/Black unemployment rates rising. Immigration decline highlighted as reducing labor supply.
• Economic Growth:
  • June: Solid expansion, but some softening expected. Uncertainty easing slightly.
  • July: Growth slowed in H1; expected low in H2. Consumer spending weaker, housing softening, agriculture struggling.

Meaning: June participants saw tariffs as potentially temporary; July participants more worried about tariff persistence and risks to labor markets.

8. Policy Discussion

• June: All agreed to hold rates at 4.25–4.50%. Tone was that uncertainty had diminished slightly; some saw possible cuts later this year.
• July: Almost all agreed to hold rates, but Bowman & Waller dissented, wanting a 25 bp cut, arguing tariffs temporary and downside employment risks rising.

Meaning: June was unanimous; July saw first cracks in consensus.

9. Post-Meeting Statement

• June: Said growth “continued to expand at a solid pace,” uncertainty “diminished but remained elevated.”
• July: Said growth “moderated in the first half,” uncertainty “remained elevated.”

Meaning: Clear shift toward weaker growth tone and less progress on uncertainty.

🔑 Overall Takeaways

1. Tone shifted from June’s cautious optimism to July’s weaker growth and stickier inflation.
2. Tariffs moved center stage: June saw them as a risk, July showed them in actual data.
3. Policy unity broke down: June unanimous, July dissent (Bowman, Waller).
4. New systemic issue: Stablecoins (GENIUS Act) flagged in July minutes.
5. Forward-looking stance: June hinted at possible cuts; July emphasized waiting for clarity but warned of persistent inflation risk.

July Minutes

1. Framework Review

• Participants continued their review of the Federal Reserve’s monetary policy strategy, tools, and communications.
• Revisions to the Statement on Longer-Run Goals and Monetary Policy Strategy are nearly finalized, incorporating lessons from the post-2020 period and aiming to be robust across economic conditions.

2. Financial Markets and Open Market Operations

• Markets stable: Policy rate expectations and Treasury yields were little changed; equities rose; credit spreads narrowed; the dollar depreciated slightly.
• Optimism around AI-driven tech firms pushed the S&P 500 above long-term valuation averages, while small-cap valuations stayed below historical averages.
• Repo rates rose modestly at quarter-end; standing repo facility (SRF) saw record usage ($11 billion).
• ON RRP take-up expected to fall as Treasury rebuilds the Treasury General Account (TGA), with reserves projected to decline for the first time since 2022.

3. Staff Economic Review

• GDP: Expanded weakly in 1H25; Q2 rebounded after Q1 decline, supported by net exports.
• Inflation: Stalled at elevated levels—June PCE at 2.5%, core PCE at 2.7%. Tariffs contributed to higher goods inflation.
• Labor market: Unemployment at 4.1%; payroll growth slowed but still positive; wages rose 3.7% YoY.
• Global economy: Slowing growth abroad; Canada contracted, China grew moderately. Foreign central banks diverged, with some easing (Mexico, Switzerland) and others holding steady (ECB, BoE).

4. Financial Stability

• Equities & credit: High valuations; credit spreads very tight.
• Households: Debt-to-GDP at 20-year low; balance sheets strong.
• Vulnerabilities:
  • Nonbank sector (life insurers, hedge funds) facing leverage and rollover risk.
  • CRE and FHA mortgage delinquencies elevated; student loan delinquencies spiked post–payment restart.
  • Stablecoin use expected to grow after passage of the GENIUS Act, raising both efficiency opportunities and systemic risk concerns.

5. Staff Outlook

• GDP growth forecast little changed from June—weak but supported by tariffs’ smaller-than-expected effect and slightly easier financial conditions.
• Unemployment projected to rise above the natural rate late 2025 and stay elevated through 2027.
• Inflation: Expected to remain pressured in 2025–26 (due to tariffs), then return to 2% by 2027.
• Risks: Downside for growth, upside for inflation due to tariff uncertainty.

6. Participants’ Views

Inflation

• Inflation still above 2% goal, mainly from tariffs. Some argued inflation is near target excluding tariffs.
• Tariff effects expected to phase in gradually (due to inventories, contract lags, supply shifts).
• Firms using cost-saving measures (automation, supplier switching) to absorb tariff costs.
• Risk: inflation expectations could become unanchored if tariffs persist.

Labor Market

• Still strong, unemployment near maximum employment.
• Evidence of softening: slower job growth, rising youth & Black unemployment, weaker wage gains for job switchers.
• Immigration decline reducing labor supply, especially in agriculture & construction.

Economic Activity

• Growth slowed in H1 2025 due to weaker consumption and housing.
• Investment dampened by policy uncertainty, though business sentiment improved recently.
• Agriculture under pressure from low crop prices.

Risks

• Upside inflation risk (tariffs, expectations).
• Downside employment risk (financial tightening, housing, AI displacement).
• Participants divided on which risk is greater, though majority leaned toward inflation risk.

Financial Stability

• Concerns: asset valuations, bank exposure to long-term yields, Treasury market fragility, stablecoin expansion.

7. Policy Decisions

• Federal funds rate held at 4.25–4.50%.
• Balance sheet reduction to continue smoothly.
• Most members agreed to hold rates; Bowman & Waller dissented, preferring a 25bp cut, arguing tariffs are temporary and employment risks are rising.
• Directive reaffirmed commitment to maximum employment and 2% inflation target.
• Tools reaffirmed: SRF, ON RRP, monthly caps on Treasury and MBS runoff.

8. Votes & Attendance

• For maintaining rate: Powell, Williams, Barr, Collins, Cook, Goolsbee, Jefferson, Musalem, Schmid.
• Against (wanted 25bp cut): Bowman, Waller.
• Absent: Adriana Kugler.

Key Takeaways

1. Fed held rates steady but remains cautious—tariffs are driving short-term inflation while growth and employment show signs of softening.
2. Policymakers are divided: majority prioritizing inflation risk, minority flagging downside labor risk.
3. Stablecoin legislation (GENIUS Act) seen as both an opportunity and systemic risk.
4. The Fed stressed data dependence and flexibility, signaling readiness to shift policy if inflation persists or labor market weakens.