Minutes from the Federal Reserve’s
July gathering showed broadening support for higher borrowing costs to stamp out
lingering price pressures.
·
Growing
inflation concern:
Several Federal Reserve officials are becoming increasingly frustrated that
inflation remains above the Fed’s 2%
target, which it has missed for about five years.
·
Three
dissenters wanted higher rates: At the July meeting, the Fed voted 9–3 to keep rates at 3.5%–3.75%.
Three officials favored raising rates—the first time
since 2016 that three FOMC members dissented in the same direction.
·
Inflation
pressures remain broad:
Officials said price pressures appeared broad-based
and argued that current monetary policy may not be restrictive enough.
·
Some
wanted an immediate hike: Several policymakers believed raising rates in July
could prevent the need for larger
and more costly rate increases later if inflation remained
elevated.
·
Multiple
inflation drivers:
Policymakers cited:
o Tariffs imposed by President Trump
o Energy-price shocks linked to the Iran war
o Heavy AI-related investment and spending
o Persistent underlying price
pressures
·
Fed
still expects inflation to ease: Most officials expect inflation to moderate in the
second half of the year as the effects of tariffs and the energy shock
diminish.
·
But
risks are tilted upward:
Many officials warned that inflation could remain persistently high,
particularly because the duration of the Middle East conflict and the
inflationary impact of the AI investment boom remain uncertain.
·
Kevin
Warsh prioritizes inflation: The new Fed chairman has
repeatedly said price
stability is his top priority, although he has not clearly
indicated whether he favors an immediate rate
increase.
·
Officials
send a stronger hawkish signal: Other Fed policymakers have made clear that further tightening is likely if
inflation fails to decline.
·
Markets
have changed their expectations: Despite the hawkish tone of the July minutes, more
recent economic data have reduced investor expectations of a near-term rate
hike. Markets now see September
as unlikely and expect any increase no earlier than December.
·
Latest
data are mixed:
July CPI showed only a modest increase in inflation, while the labor market was described by Fed officials as stable, with demand and supply broadly
balanced.
·
Trump
again demands lower rates: President Trump renewed his criticism of the Fed,
arguing that interest rates should be reduced rather than increased.
·
Bond-market
pressure adds another challenge: Global government bond yields have surged, with the 30-year U.S. Treasury yield reaching
its highest level since 2007, reflecting concerns about
inflation, government debt and massive AI-related corporate borrowing.
·
Treasury
intervention eased yields: Long-term yields fell after the Treasury Department
announced it would double
weekly debt buybacks from $2 billion to $4 billion.
·
Jackson
Hole will be closely watched: Warsh is expected to provide
important signals on the future direction of monetary policy when he speaks at
the Fed’s Jackson Hole
conference next week.
·
Possible
change to Fed meeting schedule: The minutes confirmed that Warsh
proposed reducing scheduled Fed policy meetings from eight to six per year,
arguing that longer intervals would give officials more economic information
and more time to consider strategic issues.
Bottom line: The July minutes reveal a more hawkish Fed than markets had
expected, with several officials already favoring
higher rates to contain persistent inflation. However, softer recent economic
data have reduced the probability of an immediate hike, making December the earliest rate increase
currently anticipated by investors.
An increasing number of officials at the Federal Reserve are
growing impatient about the lack of progress in getting inflation under control,
leading several policymakers to support raising interest rates in July, according
to minutes from last month’s gathering.
Policymakers voted 9 to 3 in favor
of holding rates steady at a range of 3.5 percent to 3.75 percent at the end of
last month. It was the first time since 2016 that three officials on the Federal
Open Market Committee dissented in the same direction regarding a policy change.
The discussion at the latest meeting, a record of which was
released on Wednesday, centered on inflation, which has
overshot the Fed’s 2 percent target for five years. Fresh price pressures stemming
from the war with Iran, surging investments tied to the artificial intelligence
boom and President Trump’s tariffs have pushed it even further out of reach.
Several participants at the meeting supported higher rates,
the minutes said, given their view that “price pressures appeared broad based” and
that the Fed’s current policy settings were not helping to tame inflation. Of that
cohort, a few specified that raising rates in July would “likely help forestall
the need for a steeper and potentially more costly sequence of tightening moves
at a later stage.”
Most officials expected inflation to ease in the latter half
of the year as the impact of tariffs and the energy shock from the Iran war faded,
according to the minutes. But many stressed the possibility that inflation might
remain “more persistently elevated.” The risks, policymakers noted, were “skewed
to the upside,” not least because of uncertainty over the end of the Middle East
conflict but also the relentless rise in prices related to the A.I. build-out.
Kevin M. Warsh, in his first few
months as chairman, has made taming inflation his top priority. He has repeatedly
vowed that the Fed under his watch would deliver price stability. But he hesitated
at the news conference that followed the July meeting to specify if that would require
higher rates.
In the absence of a clear steer from Mr. Warsh, whose comments contributed to a sharp sell-off in long-term
U.S. government bonds, other officials have stepped in to fill the void. They have
been explicit that if inflation does not soon decelerate, they will support higher
borrowing costs, a point that was emphasized during July’s discussions.
“With regard to the outlook for monetary policy, participants
reiterated that their interpretations of incoming information would be a key component
of their deliberations,” the minutes said. “Many participants assessed that policy
tightening would likely be necessary if inflation did not decline.”
Various policymakers at the July meeting also drew a link
between the tightening of financial conditions that occurred in the weeks leading
up to the central bank’s latest gathering and how markets perceive officials’ appetite
to raise rates. According to the minutes, that move was attributed to both higher
growth prospects and an expectation that the Fed “would adopt a more restrictive
policy stance before long.”
But in the weeks since the Fed last met, officials have received
a round of economic data that has prompted investors to scale back their expectations
about when the Fed will raise rates this year. The odds of an increase at the Fed’s
next meeting in mid-September have fallen sharply, and investors do not expect any
adjustment until December at the earliest.
The latest Consumer Price Index report showed a modest increase
in inflation in July. That came on the heels of a mixed jobs report in which employers
shed workers last month and the unemployment rate dropped slightly to 4.1 percent
as hundreds of thousands of people left the labor force.
In July, officials characterized the labor market as “stable,
with labor demand and supply in balance.”
Later on Wednesday, Mr. Trump revived his call for lower rates
at an event at the White House. “Now, when we announce good numbers, which we’re
doing all the time, they keep driving the interest rates up, because they’re so
afraid of inflation,” he said. “And they shouldn’t be. They should allow interest
rates to go down.”
Fed officials are also now having to contend with a global
government bond rout that has lifted yields on 30-year Treasuries to the highest
level since 2007. Treasury yields fell back sharply on Wednesday after the Treasury
Department announced that it would increase the scale at which it buys back its
own debt, to $4 billion per weekly operation from $2 billion.
Up until Wednesday’s intervention, investors had attributed
the rise in yields to a confluence of factors, including concerns about soaring
debt levels, a deluge of corporate bonds issued by technology companies to fund
the build-out of artificial intelligence infrastructure and angst about inflation
and how the Fed will ultimately tame it.
Mr. Warsh will have an opportunity
to help to ease some of this angst when he speaks at the Fed’s annual conference
in Jackson, Wyo., which is set to kick off at the end of next week. The gathering
brings together central bankers from around the world to discuss the latest economic
developments. The speech from the head of the Fed is among the closely watched aspects
of the event.
The minutes on Wednesday also confirmed reporting by The New
York Times that Mr. Warsh raised at the July meeting the
idea of scaling back the number of scheduled policy meetings per year to six from
eight.
“The chairman observed that six scheduled meetings per year,
held roughly every two months, would allow more information to accumulate between
meetings than under current practice and provide policymakers and the staff more
time to consider strategic monetary policy issues,” the minutes said.