FOMC Minutes Highlight the Fed’s Cautious Approach

Yields climb intraday, partially fueled by FOMC minutes. Treasury yields declined slightly overnight but rose throughout the session, closing 1-3 bps higher across the curve. The 2-year yield closed at 3.99% while the 10-year is currently 4.48%. Generally hawkish FOMC minutes contributed to the move, with investors suspecting that rate cuts could be delayed longer than expected. Meanwhile, markets were risk-on following Nvidia’s earnings call, with the company reporting higher than expected Q1 revenue and earnings per share while forecasting $45B of revenue in Q2. Nvidia stock is currently up 4.75% in after-hours trading.

Fed officials are searching for clarity before additional rate cuts. Meeting minutes from May 7th revealed that the Fed is likely to hold rates higher for longer while officials continue to evaluate US economic strength and trade policy. The minutes stated, “Participants agreed that with economic growth and the labor market still solid and current monetary policy moderately restrictive, the committee was well positioned to wait for more clarity…” Meanwhile, “almost all” officials noted that inflationary pressures could be higher than originally anticipated, which supports a slower rate cut schedule. However, officials forecasted that the labor market will weaken “substantially,” and a recession was viewed “to be almost as likely as the baseline forecast.”

Data expected to show the US economy contracted in Q1 2025. Tomorrow’s Q1 GDP print is unlikely to quell concerns that the US economy will slow drastically in 2025 (and potentially beyond). The GDP print is forecasted to be -0.3% (QoQ, annualized), which would confirm the US economy contracted in Q1 after 2.4% growth in Q4 and 3.1% growth in Q3. Meanwhile, Q1 core PCE is expected to be 3.5%, which would mark a 0.9% increase from Q4. The data highlights the challenging road ahead for Fed officials, who have to weigh risks of an economic slowdown versus prolonged inflationary pressures.