Wells Fargo Economics expects the Federal Reserve to leave the federal funds rate unchanged, but says the June FOMC minutes will be scrutinised for what could move a divided committee from holding policy steady to resuming rate increases. The bank looks for detail on how policymakers interpret the recent firming in US inflation, and whether the reaction function is becoming harder to read as forward guidance is reduced under Chair Warsh.
The minutes are also likely to show how far officials view inflation pressures as persistent or driven by a temporary supply shock, and whether they see the labour market and demand as adding to price growth. Wells Fargo’s framework attributes the inflation pickup mainly to supply-side factors, with tariffs and energy central, and expects these effects to fade. Since the June meeting, oil prices have fallen further, while the June employment report showed no signs of labour-market overheating, reinforcing the call for policy to remain on hold for the foreseeable future.
Assessing Temporary Versus Persistent Inflation Pressures
We are closely watching for the release of the June FOMC minutes to see what might convince divided policymakers to hike rates. Despite some hawkish chatter, we believe the Federal Reserve will remain on hold. The core of the recent inflation debate is whether it is temporary or here to stay.
We view the recent rise in inflation as being driven by supply factors like tariffs and past energy spikes, not a booming economy. For instance, the latest core PCE reading for May came in at 2.8%, showing a slight cooling from the prior month. This suggests the underlying price pressures are not accelerating in a way that would force the Fed’s hand.
Falling energy prices further support our view, with WTI crude oil dropping from over $85 a barrel in May to around $78 this past week. The June jobs report, released this morning, also showed no signs of an overheating labor market, with payrolls adding a moderate 195,000. This data gives little reason for the Fed to pursue a more restrictive policy stance right now.
Volatility Strategy and Market Positioning Ahead of the Minutes
This suggests that implied volatility in interest rate options, like those on SOFR futures, is likely overpriced for the coming months. We see an opportunity in selling short-dated volatility ahead of the minutes’ release, anticipating a sharp but brief reaction. Over the medium term, positioning for a decline in volatility through strategies like short straddles or iron condors could be profitable as the market accepts a period of inaction.
This situation reminds us of the “transitory” inflation debate of the early 2020s, but with a key difference: the labor market is not showing the same signs of extreme tightness. Therefore, we should be prepared for the minutes to lean hawkish but treat any resulting rate-hike fears as an opportunity to fade the move. We are looking at positions in options on Fed Funds futures that benefit from range-bound price action through late summer.
