Fed Minutes: "Further Tightening Needed if Inflation Persists"...Support for Rate Hikes Expands (Comprehensive)

Three Oppose Rate Hold, Broad Support for Hikes Revealed
Hawkish Stance Amid Entrenched Inflation, Middle East Uncertainty
AI Investment Adds to Inflationary Pressure
Labor Market Remains Largely Stable

It has emerged that within the US Federal Reserve (Fed), there is a growing sentiment that further interest rate hikes may be necessary if inflation does not subside. At last month's Federal Open Market Committee (FOMC), only three members actually voted for an interest rate increase. However, the minutes revealed that "several participants" favored a 25 basis point (bp) hike (1bp = 0.01 percentage point), indicating hawkish sentiment was broader than the official vote results suggested. There are also mounting concerns that prolonged high inflation could affect not only inflation expectations but also wage and price-setting behavior.

According to the minutes of the June 28–29 FOMC released by the Fed on the 19th (local time), many participants judged that policy tightening would likely be needed if inflation failed to decrease. Some participants assessed that current financial conditions might not be sufficiently restrictive to return inflation to the Fed's 2% target.

While the majority of participants at the July meeting supported holding the benchmark interest rate at the current 3.50–3.75%, several participants preferred a 25bp increase. Noting that price pressures were widespread, they emphasized that a more restrictive policy stance would be necessary for the Fed to continuously achieve its objectives of price stability and maximum employment.

In the actual vote, nine members—including Fed Chair Kevin Warsh—voted in favor of a pause, while Beth Hammack, President of the Federal Reserve Bank of Cleveland; Lorie Logan, President of the Dallas Fed; and Neel Kashkari, President of the Minneapolis Fed, advocated for a 25bp hike.

However, the minutes revealed that "several participants" favored a 25bp increase, indicating that support for a rate hike was more widespread than the official tally suggested. The Wall Street Journal analyzed that some Fed officials without voting rights also appeared to support an interest rate increase.

Some of those who supported raising rates believed that an early hike could help avoid a series of subsequent, steeper policy tightening moves that would impose greater costs on the economy in the future.

Concerns About Entrenched Inflation... Middle East Uncertainty and AI Investment as Additional Factors

One reason for the strengthened hawkish stance within the Fed is the persistently high price levels. According to the minutes, most participants expected inflation to ease over the remainder of the year as the effects of tariffs and previous energy price hikes faded. However, many also pointed out the possibility that inflation could remain stubbornly high for longer than expected.

In particular, participants expressed concern that if high inflation persists for multiple years above the Fed's 2% target, it could affect not only inflation expectations but also wage and price-setting among businesses and workers. Repeated delays in the return of inflation to 2% due to recurring supply shocks were also cited as factors heightening vigilance over entrenched inflation.

Recently, rising military tensions in the Middle East have further increased the uncertainty surrounding the inflation outlook. Many participants assessed that the renewed escalation of conflict in the Middle East has rendered inflation projections highly uncertain. They noted that prolonged conflict could lead to continued supply chain disruptions and add further upward pressure on prices.

Within the Fed, there was also a judgment that price pressures are not limited to temporary supply shocks such as tariff hikes or rises in energy costs. Several participants noted that over the past year, price surges have been widespread across both goods and services. Some emphasized that even when discounting the direct impacts of tariffs and energy prices, underlying inflation remains elevated.

In addition, increased investment in artificial intelligence (AI) has emerged as a new inflation variable. Some participants pointed out that prices for semiconductors and steel needed in data centers have risen significantly, and that price pressures have also been observed in smartphones, computer equipment, software, and electricity. They further assessed that AI investments are either already generating broad-based upward pressure on prices or are likely to do so soon by increasing aggregate demand. However, some also noted that productivity gains from AI adoption could, in the long run, lower production costs and help contain inflation.

Labor Market Remains Stable... Additional Tightening Already Priced In

On the other hand, FOMC participants generally assessed the US labor market as remaining stable. They judged that labor supply and demand are balanced, and that the unemployment rate is steady near its long-run equilibrium level. Data on layoffs, unemployment claims, and hiring were also evaluated as being at low and stable levels. However, some participants cited a low job-finding rate and a high long-term unemployment rate as potential signs of a weakening job market.

Financial markets have already priced in the likelihood of additional Fed tightening to some extent. According to the minutes, since the June FOMC, nominal yields on US Treasuries have risen by 25–30bp, with markets as of that time fully pricing in a 25bp increase by September and another hike by the end of the first quarter next year. Meanwhile, the New York Fed's Open Market Desk Survey of Market Expectations showed that the central forecast was for no change in the policy rate for both this year and next year.

FOMC participants also assessed that tighter financial conditions in recent months reflected not only the strong growth of the US economy but also the market's expectations that the Fed would soon adopt a more restrictive policy stance.

The Fed’s future policy path is expected to depend on inflation and other economic indicators released prior to the next meeting. Participants judged that incoming information before the next meeting would help clarify the inflation outlook and reduce uncertainty. The next FOMC will be held on September 15–16.

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