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Concerns over stubborn inflation are hardening inside the US Federal Reserve, with minutes of its June policy meeting showing that a handful of policymakers already believed there was a case for raising interest rates, even as the central bank unanimously opted to keep borrowing costs unchanged.
The minutes of the June 16-17 Federal Open Market Committee (FOMC) meeting, released on Wednesday, revealed that Fed officials are becoming increasingly uneasy about persistent price pressures, while concerns over the labour market have eased somewhat. The meeting was the first chaired by Kevin Warsh after he took over as Federal Reserve chief.
The Fed left its benchmark federal funds rate unchanged at 3.50-3.75 per cent during the meeting, maintaining a wait-and-watch approach amid an uncertain economic backdrop.
Inflation risks dominate policy debate
The minutes showed that policymakers broadly agreed inflation risks remain tilted to the upside.
“Participants generally assessed that information received over the intermeeting period suggested that upside risks to price stability remained elevated while downside risks to achieving maximum employment had moderated a bit,” the minutes said.
While all members ultimately backed the decision to hold rates steady, “a few participants” argued there was already enough evidence to justify raising borrowing costs at the June meeting.
The broader discussion reflected a Fed increasingly divided over how inflation will evolve in the coming months. Most officials outlined two possible paths for the economy.
In one scenario, inflation gradually moderates towards the Fed’s 2 per cent target, allowing policymakers to either maintain current rates or eventually begin easing monetary policy.
However, officials also discussed a second scenario in which inflation remains stubbornly high due to strong artificial intelligence-driven demand, elevated energy prices and higher tariffs. Under that outcome, most participants said additional policy tightening would likely become necessary.
AI investment emerges as new inflation concern
One notable feature of the discussion was the emergence of artificial intelligence as a potential source of inflationary pressure.
Officials warned that booming investment linked to AI could keep demand stronger than expected, adding to price pressures alongside volatile energy markets.
Several policymakers also observed that inflation had broadened beyond a few categories.
According to the minutes, participants pointed to substantial price increases across transportation, airfares, petrochemical products and agricultural inputs. They also noted that services inflation excluding housing had shown little improvement and remained elevated.
The concerns were reinforced after the meeting by fresh inflation data showing the Fed’s preferred inflation gauge — the personal consumption expenditures (PCE) price index — rose 4.1 per cent in May from a year earlier, the fastest pace since April 2023.
Core PCE inflation, which excludes food and energy prices, accelerated to 3.4 per cent, suggesting underlying inflationary pressures remain persistent.
Iran conflict clouds inflation outlook
The Fed’s inflation outlook has also become more complicated because of renewed tensions in West Asia.
Oil prices initially fell after a ceasefire between Iran and the United States appeared to stabilise shipping through the Strait of Hormuz. However, renewed hostilities have once again pushed crude prices higher.
On Wednesday, US President Donald Trump said he believed the ceasefire had effectively ended and indicated the United States could launch further military strikes on Iran.
Higher energy prices have emerged as a key risk that could delay progress in bringing inflation back to the Fed’s target.
Markets expect possibility of rate hikes
The latest projections released alongside the June meeting highlighted the increasingly divided views inside the central bank.
Nine policymakers projected at least one quarter-percentage-point rate hike this year, with six expecting two or more increases. Another nine officials anticipated either no change or a rate cut.
Warsh himself did not submit an individual interest-rate projection, reflecting his criticism of the Fed’s traditional practice of providing forward guidance through rate forecasts.
Financial markets continued to price in one or two quarter-point rate hikes this year following the release of the minutes, with investors closely watching upcoming inflation data.
The next major test for policymakers will come on July 14, when the US government releases June consumer inflation figures. Warsh is also scheduled to deliver his first congressional testimony that day before the House Financial Services Committee.
Warsh begins reshaping Fed communication
Beyond monetary policy, the minutes also offered a glimpse into Warsh’s effort to overhaul how the Federal Reserve communicates with markets.
The June post-meeting statement was noticeably shorter than previous policy announcements. According to the minutes, a majority of officials supported simplifying future statements and removing language that implicitly signals the likely direction of interest rates.
Most policymakers also backed eliminating references suggesting that the next policy move would probably be a rate cut.
The minutes themselves were around 20 per cent shorter than those issued after the Fed’s April meeting under former Chair Jerome Powell, signalling Warsh’s push towards more concise communication.
Warsh also briefed policymakers on plans to establish five internal task forces to review the central bank’s monetary policy framework and operations.
Despite heightened inflation concerns, officials remained broadly optimistic about the US economy, with the minutes indicating expectations for solid real GDP growth through the rest of 2026. Policymakers also assessed that labour market conditions remained stable and were not currently contributing significantly to inflationary pressures.
