US Fed policymakers’ inflation concerns increased at July meeting, minutes show

Inflation concerns grew at the Federal Reserve’s July meeting, according to minutes released on August 20. Several policymakers were prepared to increase interest rates, while many argued that higher borrowing costs would be required if inflation did not decrease to the 2% target set by the central bank. The policymakers who favored a rate hike highlighted that price pressures were widespread and believed the Committee should adopt a more restrictive policy stance to meet its aims of price stability and full employment.

The Fed maintained its benchmark interest rate within the current 3.5% to 3.75% range at the July meeting, with three dissenting voices urging a quarter-percentage point hike. The minutes, covering the second meeting of Fed Chairman Kevin Warsh, demonstrated that central bankers were already considering broader issues that Warsh aims to address as part of a potential overhaul of the Fed's operations.

Participants saw the upcoming review of the Fed's balance sheet management as a chance for a comprehensive discussion, but many reaffirmed that adjusting the stance of monetary policy should primarily be through changes in the federal funds rate target, rather than manipulating the Fed's asset holdings. Warsh also requested input from the Committee on whether holding only six meetings a year instead of the current eight, allowing for two full months of data accumulation each time, would be more beneficial.

No decisions were made on this matter, and the 2026 meeting schedule would remain unchanged. The minutes did not generate significant reaction in financial markets. An announcement on August 19 that the Treasury would double its buyback of longer-term US government debt helped ease upward pressure on yields and lift stocks after a sharp drop on August 18.

Rate-futures markets continued to price a better-than-even probability of the Fed beginning rate hikes at its October 27-28 meeting and, if not, a very high chance of a rate hike at its final meeting of the year in December. The minutes did not mention any support for a rate cut, indicating how the Fed's policy debate had shifted over the past year, beginning with an expectation that the central bank would lower borrowing costs as inflation slowed.

Price pressures have continued to rise, particularly after the Trump administration joined Israel in a conflict with Iran, which has constrained oil and gas shipments through the strategic Strait of Hormuz for nearly six months following the outbreak of the war. The Fed is expected to keep its policy rate steady again at its September 15-16 meeting after recent data showed a slight easing of inflation and unexpected job losses in July, leaving officials divided on whether rate hikes will be necessary to further slow inflation, but also more cautious about the strength of the labor market and the risks to their goal of maintaining full employment. Warsh has been reluctant to discuss the path of monetary policy during his tenure.