Fed minutes show many back hikes if inflation stays high

Federal Reserve minutes from the July meeting showed many US policymakers believed interest rate increases would likely be needed if inflation did not decline, while three voting members dissented from the decision to keep rates steady.

The minutes, released on Wednesday after a routine three-week lag, said many Federal Open Market Committee participants assessed that further policy tightening would probably be necessary if inflation failed to fall.

Three of the 12 voting members opposed the majority decision to hold rates steady and called for an immediate 25-basis-point increase. The minutes identified them as regional Fed presidents Beth Hammack, Lorie Logan and Neel Kashkari.

The minutes said those participants judged that price pressures appeared broad-based and that the committee should adopt a more restrictive stance to meet its inflation and maximum-employment mandate. All three have since said they favoured raising rates now to avoid the possible need for steeper increases later.

Most policymakers favoured waiting for incoming data before the Fed’s September meeting, saying it could give more clarity and reduce uncertainty about the inflation outlook. The Fed has missed its long-term 2% inflation target for more than five years. Recent consumer inflation readings and the Fed’s preferred Personal Consumption Expenditures price index have eased, but remain well above the target.

The minutes also recorded a range of views on the effect of the AI boom on prices. Some participants said the impact on consumer prices appeared limited, while others saw broader effects. Policymakers said economic activity had continued to expand at a solid pace, but noted that business investment was concentrated in AI industry spending.

Participants said uncertainty about the path of inflation remained high and that the Iran war had significantly clouded the outlook.

The minutes confirmed earlier US media reports that Fed chair Kevin Warsh suggested reducing the number of rate-setting meetings from eight to six a year. Warsh said fewer meetings would allow more information to build between decisions and give policymakers and staff more time to consider strategic monetary policy issues. No decision has been made on changing the committee’s schedule.

Since taking over in May, Warsh has ended forward guidance on the likely direction of Fed policy and called for the central bank to communicate less about its decision-making process. Long-term US bond yields have touched multi-decade highs as investors assess having less information on how the Fed will set monetary policy.