More Fed Officials Lost Patience About Elevated Inflation at Latest Meeting
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 9-3 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 also 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 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.”
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.