Fed Opens Door to Rate Hikes... AI, Middle East, and Tariffs Fuel Inflation Pressures

June FOMC Minutes Released
Warsh Removes Easing Bias at His First FOMC
"Further Tightening Needed If Inflation Remains High"
AI Investment Cited as Inflationary Pressure Factor

The Federal Reserve (Fed) has reopened the possibility of additional rate hikes. Although the Federal Open Market Committee (FOMC) unanimously decided to keep the policy rate unchanged last month, there is a growing consensus within the Fed that further tightening may be necessary if energy price instability caused by the Iran war, the effects of tariff hikes, or the artificial intelligence (AI) investment boom reignite inflation.

According to the minutes of the June FOMC meeting released by the Fed on July 8 (local time), participants believed that if inflationary pressures ease soon, the policy rate could be maintained at the current level or even lowered in the future. However, they judged that “some policy tightening would be necessary” if inflation remains high due to factors such as robust AI-related demand, ongoing conflicts in the Middle East, and the impact of tariffs, even while the labor market remains stable.

This meeting was the first FOMC session chaired by Fed Chair Kevin Warsh since he took office. At the meeting held on June 16–17, the Fed kept its policy rate target range steady at 3.50–3.75% per annum. The decision was unanimous at 12-0. However, the minutes reveal that, beneath the surface of the rate hold, the focus of discussions within the Fed has shifted from the possibility of rate cuts to the potential for rate hikes.

The minutes stated, “Participants generally assessed that the upside risks to price stability remain high, while the downside risks to achieving maximum employment have somewhat eased.” In other words, concerns over a slowdown in employment have diminished, whereas the risk of inflation reaccelerating has emerged as the Fed’s key variable.

In fact, some participants believed there was justification for raising rates at the June meeting. Nevertheless, these participants also supported holding rates steady at this meeting. Bloomberg reported, “Some Fed officials believed there was a case for raising rates at the June meeting.”

The Wall Street Journal (WSJ) noted that the Fed’s dilemma has shifted from “what is needed to lower rates” at the start of the year to “whether rates need to be raised.” The Financial Times (FT) also reported that some Fed officials viewed future rate hikes as potentially necessary to curb inflation.

AI Investment Exerts Short-Term Inflationary Pressure 

Wall Street. AP Yonhap News

The Fed’s concerns about inflation stem from multiple factors. The minutes cited several recent causes of rising prices: the pass-through effects of previous tariff increases, higher energy and input costs due to Middle East conflicts and the closure of the Strait of Hormuz, and surging demand for technology products and electricity driven by the AI investment boom.

In April, the Personal Consumption Expenditures (PCE) price index rose 3.8% year-on-year, while core PCE increased by 3.3%. Fed staff estimated that in May, the PCE price index further climbed to 4.1% and core PCE to 3.4%. These levels are well above the Fed’s 2% target.

One particularly notable aspect of this meeting’s minutes is the repeated mention of the AI investment boom as a new source of inflationary pressure. Fed participants believed that demand for AI infrastructure could continue to put upward pressure on prices for technology products and electricity. While investments in data centers, high-performance semiconductors, power grids, and software are boosting corporate capital expenditures and contributing to economic growth, they judged that—at least in the short term—demand may outstrip supply capacity, thereby fueling inflation.

Some participants believed that the introduction of AI could, in the long term, boost productivity and expand supply capacity, ultimately lowering prices. However, they also judged that it would take time for such effects to materialize.

Robust U.S. Labor Market...All Eyes on June CPI

The Fed no longer regards the labor market as the primary driver of inflation. According to the minutes, participants assessed that the unemployment rate has stabilized near its long-term equilibrium level, and that recent employment growth is largely in line with labor force growth.

Most participants concluded that the labor market is not currently a source of inflationary pressure. With concerns about a slowdown in employment having eased, the rationale for the Fed to rush into rate cuts has also weakened.

As a result, market attention is now turning to the June Consumer Price Index (CPI), which is scheduled for release on July 14, according to Bloomberg and other sources. This shift is because the Fed minutes noted that recent inflation has resulted from a mix of factors, including the effects of tariff hikes, rising energy costs due to Middle East tensions, and the expanded demand from the AI investment boom.

The Iran situation is also once again posing a challenge for the Fed. At the time of the June FOMC, optimism over a provisional U.S.-Iran agreement and the potential reopening of the Strait of Hormuz had driven down international oil prices. As a result, short-term inflation expectations were somewhat tempered.

However, on this day, U.S. President Donald Trump declared that the ceasefire with Iran had ended and mentioned the possibility of additional airstrikes, causing oil prices to surge once again. This means the energy price stability scenario the Fed had assumed could be undermined.

This content was produced with the assistance of AI translation services.