Stellar 10Y Auction Stops Through, With 3rd Highest Foreign Demand On Record

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The manager turned first to an overview of market developments during the intermeeting period. Asset prices were affected by a number of factors, including developments related to the conflict in the Middle East, continued solid real economic data, higher inflation data, and ongoing investment in artificial intelligence (AI). Optimism around a near-term resolution of the conflict in the Middle East and the announcement of a memorandum of understanding between the U.S. and Iran pushed the oil futures curve and near-term inflation compensation materially lower relative to levels from the time of the April FOMC meeting. Expected policy rates, Treasury yields, the U.S. dollar, and domestic equity prices all rose. Regarding monetary policy expectations, the manager observed that market participants and respondents to the Open Market Desk Survey of Market Expectations (Desk survey) generally expected no change in the target range of the federal funds rate at the June FOMC meeting. Market- and survey-based measures of expected policy rates moved higher over the intermeeting period. In the Desk survey, the median of the modal paths of the federal funds rate implied no changes in the target range through the beginning of 2027 and one rate cut in the second quarter of next year. Market pricing suggested that one rate hike was priced for mid-2027, but the manager noted that these measures were likely boosted, in part, by term premiums. The manager then discussed inflation expectations. He noted that optimism around the Iran conflict pushed market-based measures of expected inflation significantly lower over the period, leaving near-term inflation expectations only moderately higher than they were before the onset of the conflict. Longer-term inflation expectations remained well anchored near the Committee's 2 percent longer-run inflation objective. Fed: Officials saw the labor market remaining stable in the near term. *FED: A FEW SAW CASE FOR RAISING RATES AT JUNE FOMC MEEETING Fed Minutes: Fed staff forecast for inflation in 2026 and 2027 was higher than in April forecast, reflecting the Middle East war and effects of AI buildout. FOMC Minutes Show 'A Few' Fed Members Wanted To Hike In June, 'Majority' Fear Higher Inflation Today's FOMC minutes will be scrutinized for further insight into policymakers' appetite for additional rate hikes and the thinking behind the Committee's hawkish shift at last month's meeting. The minutes are an account of the June 17th meeting and therefore will not reflect subsequent developments, including the softer-than-expected June nonfarm payrolls report or Chair Warsh's appearance at the ECB's Sintra Forum. Since the last FOMC meeting (June 17th), the dollar has strengthened (on the hawkishness) and gold (and bitcoin) mirrored that with sizable declines. Stocks are flat, bond yields are higher (prices down), and oil remains lower, but accelerating in the last couple of days...