When many economic indicators pointed to issues with inflation, the governors of the Federal Reserve’s Open Market Committee (FOMC) instead voted once again to maintain their “wait and see” approach in their most recent meeting.
Newly released minutes from the meeting, however, reveal that three members of the committee did in fact advocate for a rate hike, but were outvoted by 9-3.
Fed Governors Beth Hammack, Neel Kashkari and Lorie Logan all voted in favor of a 25-percentage point hike to interest rates, arguing that the FOMC should “adopt a more restrictive policy stance to meet its commitment to achieving its price-stability and maximum-employment goals on a sustained basis.”
These three governors “judged that doing so (increasing rates) would likely help forestall the need for a steeper and potentially more costly sequence of tightening moves at a later stage,” the minutes state.
Inflation has been elevated in response to the continued conflict with Iran, seeing a small reprieve when gas and energy inflation dropped in response to a potential ceasefire deal on the table. With that ceasefire deal seemingly dead, the future of inflation is once again murky.
As the minutes note, the Fed did acknowledge that developments between the June and July FOMC meetings were “influenced by the conflict in the Middle East.”
“Oil prices ended the period higher following the escalation of tensions in the Middle East,” the minutes continued. “Across asset classes, inflation compensation moved little in response to higher oil prices, nominal rates rose largely on expectations of higher policy rates, equities were somewhat lower, and the dollar edged up modestly.”
Even with some improvement, the minutes called out that overall inflation and core inflation still remain elevated year-over-year due to “the effects of past tariff increases, higher energy and input costs stemming from the conflict in the Middle East, and the surge in demand related to the AI buildout.” Core goods were also up year-over-year due to tariffs and “AI-related price pressures.”
In terms of the inflation outlook for the second half of the year, the committee continued to consider the uncertainty around the economic outlook as “substantial,” due to “uncertainty surrounding ongoing geopolitical developments and the potential economic effects of AI investment and adoption.”
“Participants judged that their inflation outlooks were highly uncertain and that inflation risks were skewed to the upside,” the minutes continued. “Many participants noted that the recent re-escalation of the conflict in the Middle East significantly clouded the inflation outlook. These participants remarked that a protracted conflict could prolong supply chain challenges and could put upward pressures on inflation.”
Other risks to the economy ahead include AI, as several committee members saw the investment in AI as “already having broader effects on prices by pushing up aggregate demand or assessed that it would likely do so relatively soon.” Others did note that it was still relatively too early to tell the effects of AI growth.
Committee members did assess, however, that the pass-through effects of tariffs were “largely complete” and this contribution to inflation would “likely be modest” moving forward.
Although the members voting for a rate hike did not “win” this round, the minutes do outline that for future meetings, rate hikes may again be on the table if inflation doesn’t start to come down.
“Many participants assessed that policy tightening would likely be necessary if inflation did not decline,” the minutes stated. “Some participants commented that financial conditions might not currently be sufficiently restrictive to facilitate a return of inflation to 2%.”
