Service sector slowdown adds to worries on US growth prospects

The manager turned first to a review of developments in financial markets. Financial conditions eased modestly over the intermeeting period mainly because of higher equity prices. Taking a somewhat longer perspective, the manager noted that financial conditions had changed little since March but eased notably since the fall. The main drivers of that easing were again higher equity prices, which appeared to respond to the reductions in the perceived odds of a recession, and a consensus among market participants that the federal funds rate has reached its peak. Nominal Treasury yields declined moderately across the curve, on net, but continued to be very sensitive to incoming data surprises, especially those pertaining to inflation and the labor market. The net decline in nominal yields over the period was primarily due to lower real yields. Inflation compensation also fell somewhat, especially at shorter horizons. Longer-term inflation expectations remained well anchored. The manager turned next to policy rate expectations. The path of the federal funds rate implied by futures prices shifted a bit lower over the intermeeting period and indicated one and one-half 25 basis point cuts by year-end. This shift appeared to reflect mostly changes in perceived risks rather than base-case expectations because the modal path implied by options was virtually unchanged and remained consistent with, at most, one cut this year. The median of modal paths of the federal funds rate obtained from the Open Market Desk's Survey of Primary Dealers and Survey of Market Participants—taken before the May employment report—was also little changed. The manager then discussed expectations regarding balance sheet policy. Responses to the Desk surveys showed a median expected timing for the end of balance sheet runoff of April 2025, one month later than in the previous surveys, though individual respondents' views of the exact timing remained dispersed. Respondents' expectations about the size of the portfolio at the end of runoff had changed little in recent surveys. In international developments, the European Central Bank (ECB) and the Bank of Canada (BOC) initiated rate-cutting cycles this period, as generally expec post: FED MINUTES: MOST PARTICIPANTS SAW CURRENT POLICY STANCE AS RESTRICTIVE post: FED MINUTES: SEVERAL PARTICIPANTS SAID IF INFLATION WERE TO PERSIST AT ELEVATED LEVEL OR RISE FURTHER, FUNDS RATE MIGHT NEED TO BE RAISED. post: FED MINUTES: A NUMBER OF PARTICIPANTS SAID POLICY SHOULD STAND READY TO RESPOND TO UNEXPECTED ECONOMIC WEAKNESS. post: Fed Awaits 'Additional Information' To Gain Confidence To Cut - Officials Saw 'Modest Further Progress' On Inflation Goal - Many Officials Concerned By Lower-Income Family Strains - Several On Fed Say Hike Might Be Warranted If Infl. Persists - Unemployment To 'Edge Down' Over…