The minutes from the Federal Reserve's June 17-18 policy meeting will be released at 2:00 AM Beijing time on Thursday, and are expected to show that there are divisions within the central bank: officials are grappling with the expected economic impact of the increase in U.S. import tariffs and are reluctant to commit to rate cuts before clarifying the extent to which the Trump administration's tariff hike will push inflation.

Federal Reserve Governor Waller and Vice Chair for Supervision Bowman, both appointed during Trump's first term, have stated that they may consider lowering the benchmark interest rate as early as the meeting on July 29-30.

The upcoming June meeting minutes need to clarify the following points: whether other policymakers agree with the view that 'the impact of tariffs on prices may be short-term'; what the basis of expectation is for the 7 officials who believe rates should not be cut at all in 2025; and whether they have serious concerns about the strength of the labor market.

The Federal Reserve kept its policy rate in the range of 4.25%-4.50% last month, maintaining this level since December of last year. Its minutes are typically released three weeks after each meeting, which means they are somewhat lagging.

The discussions covered in the latest meeting minutes took place before last week's unexpectedly strong June U.S. employment report and well ahead of Trump's latest tariff threats, which include imposing tariffs on multiple countries starting August 1, including a 25% tariff on imports from major trading partners such as Japan and South Korea.

How long will the Federal Reserve's wait-and-see period last?

However, these minutes will supplement details of discussions at key points: at that time, Trump publicly called for the Federal Reserve to significantly cut rates, while new data and survey results indicated a potential situation of rising prices coexisting with slowing job growth, which poses a potential policy dilemma for Federal Reserve officials tasked with 'maintaining 2% inflation and low unemployment.'

After the June meeting, Federal Reserve officials stated that since spring (when Trump's tariff threats led to a sharp decline in global trade and concerns about a recession in the U.S.), the extreme uncertainty and concerns brought about by trade policy have eased somewhat, but many issues in the trade dispute remain unresolved, as they still do today.

Citigroup analysts expect the minutes to show that 'the rate trajectory will depend on the data released in June, July, and August,' which is consistent with Federal Reserve Chairman Powell's recent statements at congressional hearings. Powell's remarks laid the groundwork for a possible rate cut at the September 16-17 meeting, provided that the price increases caused by tariffs do not show signs of persistent inflation and that the economy can create enough jobs to prevent the unemployment rate from rising too quickly.

'The 'wait-and-see period' may end by late summer,' said Citigroup analysts.

The Federal Reserve faces a policy adaptability dilemma.

The core inflation data from the U.S. to be released next week will be one of the summer statistics that the Federal Reserve will closely monitor. These data may signify the transition of the U.S. from the 'low-tariff world' during Trump's presidency (when the average import tariff rate was around 2.5%) to the 'high-tariff era.' Economists estimate that the final tariff levels could raise the import tax rate to 16% or higher.

Currently, Trump frequently demands Powell's resignation using insulting language and urges the Federal Reserve to significantly cut interest rates. However, among the 19 policymakers at the Federal Reserve, most are only tentatively leaning towards rate cuts: 9 officials believe rates should not be cut this year or only by 25 basis points, 8 support two cuts of 25 basis points, and only 2 anticipate three cuts of 25 basis points.

Investors expect the Federal Reserve to restart interest rate cuts in September, but this largely depends on inflation performance in the coming months: how companies will share the rising costs of imported goods and supplies, and whether this increase is a one-time price adjustment or the beginning of sustained price rises.

The Federal Reserve's latest economic forecasts show that officials seem prepared to 'tolerate' rising inflation in the future. They expect price increases to potentially widen for the remainder of the year, but to decline in 2026, even if the interest rate is expected to be lowered.

Regardless, for policymakers, when to cut rates and by how much remains a difficult choice. UBS chief U.S. economist Jonathan Pingle estimates that if the Trump administration implements higher tariffs starting August 1 and subsequently imposes more tax measures, the preferred Personal Consumption Expenditures (PCE) price index of the Federal Reserve could rise to 3.4% by the end of the year, far exceeding the 2% target and higher than most Federal Reserve officials' expectations, while economic growth may slow to an annualized rate of around 1%.

Theoretically, such price shocks should be a one-time cost change, which would reduce wage purchasing power, slow growth, and even affect employment, especially when monetary policy is at a level of 'further restraining economic activity.'

Pingle stated that tightening monetary policy does not help curb this type of inflation, but if the Federal Reserve claims that 'inflation rises are temporary' and then cuts interest rates, the situation will still be 'very tricky.' In 2021, the Federal Reserve misjudged the nature of inflation, leading officials to delay rate hikes, resulting in accelerating inflation.

Even waiting until autumn, 'by then (the Federal Reserve) will still not be able to determine whether this inflation is temporary or more persistent,' Pingle said, 'but they will know that high policy rates are not the appropriate tool to solve this type of inflation problem and could instead exacerbate an already weak labor market.'