Fed Minutes Show Many Officials Said Rate Hikes May Be Needed

Several Federal Reserve officials favored an interest-rate hike last month and many indicated that policy tightening would be necessary if inflation didn’t decline, a record of the central bank’s most recent policy debate showed.

Uncertainty, however, continued to weigh heavily on Fed officials at their July 28-29 meeting.

“With regard to the outlook for monetary policy, participants reiterated that their interpretations of incoming information would be a key component of their deliberations,” minutes of the Federal Open Market Committee’s meeting released Wednesday in Washington said.

The FOMC voted 9-3 in July to hold the benchmark federal funds rate in the range of 3.5% to 3.75%. Dallas Fed President Lorie Logan, Cleveland’s Beth Hammack and Minneapolis Fed chief Neel Kashkari dissented in favor of raising rates by a quarter percentage point.

Two other regional presidents who didn’t hold a vote in July, Kansas City’s Jeff Schmid and St. Louis chief Alberto Musalem, have since signaled they would have supported an increase at the meeting.

Much of the policy debate at the July gathering centered on the varying outlooks for inflation.

“Most participants anticipated that inflation would step down over the rest of the year as the effects of tariffs and earlier energy price increases wane, but many participants noted the possibility that inflation might be more persistently elevated,” the minutes said.

In the Fed’s so-called counting words used in the minutes, the term “many” is used to describe a group that is nearly half of all 19 policymakers, including officials who don’t vote on rate decisions.

‘Highly Uncertain’

The record showed participants’ inflation outlooks were “highly uncertain” and the re-escalation of the Iran war “clouded the inflation outlook.”

Officials described the labor market as stable, with labor demand and supply in balance.

In their post-meeting statement, which was almost identical to their June statement, officials repeated their pledge to “deliver price stability.” They also continued to characterize growth as “solid” while noting that capital investment and productivity growth were strong.

The July vote marked the fifth straight time officials have opted to leave rates unchanged following three cuts in late 2025.

Press Conference Blowback

Fed Chairman Kevin Warsh was roundly criticized for his performance at a post-meeting press conference, where he failed to articulate a rationale for the committee’s decision to keep rates unchanged. He also avoided any suggestion that the committee may have to raise rates in the coming months and suggested the FOMC’s target for inflation could be altered in January.

Investors reacted by pushing yields on longer-dated bonds to an almost two-decade high, a possible sign of declining confidence in the Fed’s commitment to its 2% inflation target. Yet not all indicators of expected inflation rose significantly. The spread between yields on regular and inflation-protected US Treasuries five years ahead widened only modestly.

Since the July policy decision, however, new data has broadly pointed to a recent slowing in economic activity, which would take pressure off the Fed to increase rates. Retail sales fell in July by the most in more than a year as consumers pulled back on purchases at online stores and auto dealers. Core inflation for July was subdued.

At the same time employers unexpectedly cut jobs in July and hiring in the prior two months was revised lower, suggesting the labor market was weaker than previously thought.

Investors have reacted by pulling in their expectations for rate increases this year. Pricing in federal fund futures as of Wednesday morning implied about a 36% change for an increase in September after topping 70% at the end of July.

FOMC Meetings Frequency

The minutes also showed Warsh raised the idea of reducing the committee’s annual number of policy meetings from eight to six.

“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.

Warsh then asked for input from the committee on the idea. The minutes made clear the number of meetings would not be adjusted this year. A reduction in the number of policy meetings would mark a significant shift in the way the central bank operates.

The minutes come just over a week ahead of the Federal Reserve’s annual gathering in Jackson Hole, Wyoming where Warsh is expected to deliver his first speech since becoming chairman of the central bank in May.

This article was provided by Bloomberg News.