The Federal Reserve’s July meeting minutes, released on Wednesday local time, showed that policymakers are growing increasingly concerned about the inflation outlook. At the July 28-29 meeting, several officials supported an immediate rate hike, while “many” officials warned that further monetary policy tightening might be necessary if inflation fails to sustainably return to the 2% target level. The meeting concluded with a 9-3 vote to keep the federal funds rate target range unchanged at 3.50%-3.75%, marking the latest policy stance after five consecutive holds. Dissenting votes came from Dallas Fed President Logan, Cleveland Fed President Hammack, and Minneapolis Fed President Kashkari, all of whom favored a 25-basis-point hike, while two regional Fed presidents who did not have voting rights at the time later expressed similar support for a rate increase.
The inflation outlook was the core of the discussion. Most participants expected inflation to gradually decline over the course of the year as tariff effects and energy price impacts faded; however, a notable number also pointed out that inflation could remain elevated for a longer period. The minutes stated that participants’ assessments of inflation were “highly uncertain,” and that the escalation of the Iranian conflict “cast a shadow over the inflation outlook,” particularly as oil and gas transportation through the Strait of Hormuz remained constrained nearly six months after the start of the conflict.
Federal funds futures showed that, as of Wednesday morning, the probability of a September rate hike was about 36%, down sharply from over 70% at the end of July; however, markets assigned higher probabilities to rate hikes at the October or December meetings. No officials supported a rate cut in the minutes, indicating that the policy debate has clearly shifted from the rate-cut expectations seen earlier in the year.
The minutes also disclosed that Fed Chair Kevin Warsh raised the idea at the meeting of reducing the number of annual policy meetings from eight to six, arguing that holding meetings roughly every two months would allow for more information to accumulate and give policymakers more time to consider strategic issues. However, the minutes made clear that this year’s schedule would not be adjusted. In addition, many officials reiterated that the primary tool for adjusting the monetary policy stance should remain the adjustment of interest rates, rather than active balance sheet operations. Earlier, Warsh’s performance at the post-July meeting press conference drew widespread criticism, as he failed to clearly explain the rationale for keeping rates unchanged and suggested that the inflation target could be adjusted in January, which at the time undermined market confidence in the Fed’s commitment to the 2% target.
On the day the minutes were released, financial markets reacted mildly. The U.S. Treasury Department announced that it would double the scale of long-term Treasury buybacks, alleviating upward pressure on yields and helping to support a stock market rebound. Looking ahead, markets widely expect the Fed to continue to hold steady at the September meeting, but officials remain divided over whether further rate hikes are needed. Warsh is expected to deliver his first speech since taking office at the Jackson Hole Global Central Bank Symposium, where he may provide more policy clues.
