Fed Meeting Minutes: A Few Support a June Rate Hike as AI Joins Three Major Inflation Risks

Author: Yang Chen, Wall Street Insights

According to reports by Nick Timiraos, a reporter for “New Fed Whisperer” and The Wall Street Journal, the minutes from the Federal Reserve’s last meeting show that officials broadly believe that if inflation remains high this year, further rate increases will be necessary; if price pressures ease quickly, the Fed can continue to hold steady.

The minutes show that policymakers are paying increasing attention to a new source of inflation—a surge in artificial intelligence (AI) investment—that had barely appeared in discussions just a few months ago. The minutes suggest that the expansion of AI investment, the war in the Middle East, and tariff policies together are important factors that could keep inflation elevated and prompt the Fed to raise rates.

At the Fed’s meeting on June 16 to 17, it voted unanimously to keep the target range for the federal funds rate at 3.5% to 3.75%, a level that has remained unchanged since last December. Meanwhile, the policy statement removed any hint about the future direction of policy.

However, the market is still interpreting the meeting—also the first FOMC meeting under Chair Warsh—as a hawkish signal, because the latest released rate projections show a clear increase in the number of officials supporting a rate hike.

Of the 18 participants, 9 expected at least one rate hike by year-end, compared with none in March. At the same time, only 1 person expected a rate cut this year, down sharply from 12 in March.

Currently, due to repeated twists and turns in the Middle East situation, oil prices are swinging dramatically, and the inflation outlook is becoming even more complicated. On Wednesday morning, Trump said he believes the U.S.-Iran ceasefire has ended and that the United States may carry out further strikes against Iran. In response to this news, market investors early on Wednesday expected the Fed to raise rates one to two times this year.

A minority of officials thought a rate hike was warranted in June, but ultimately supported holding steady

Even the most hawkish officials at the time did not advocate taking action immediately.

The minutes show that a few participants believed the June meeting already provided sufficient justification for a rate increase, but ultimately they supported keeping rates unchanged. This means the disagreement reflected in the dot plot is more about differing judgments of the future economic outlook, rather than a split over opinions on current policy actions.

Warsh himself did not submit a rate projection, but he repeatedly emphasized the importance of restoring price stability and did not send any “staying patient” signals, further strengthening the market’s view that the Fed’s overall stance leans toward further tightening.

AI investment becomes a major inflation risk for the first time

The minutes, typically released with a three-week lag, show that officials’ concerns about the inflation trajectory ahead have intensified further.

Compared with before, more officials for the first time listed the corporate investment boom driven by AI infrastructure as a new source of persistent inflation.

The minutes noted:

“Several participants said that price pressures have become more widespread, and many prices of goods and services have risen noticeably.”

Multiple officials pointed out that large-scale data center construction and the continued expansion of compute infrastructure are exposing the U.S. economy to new demand shocks, while supply capacity is proving difficult to keep up.

Many officials believed that a year ago, the Fed could treat the price increases caused by tariffs as a one-time shock and did not need to rush to respond with policy, because the labor market was weak enough to allow for more patience.

But now, the job market has become more stable, and rising energy prices combined with the AI investment boom are both pushing up costs. This means that continuing to “wait and see” could increase the risk that inflation stays above target for a prolonged period.

Middle East situation fluctuates, inflation outlook unclear

Before the meeting, the Fed was highly focused on the possibility that conflict in the Middle East could push up energy prices and further evolve into stickier inflation.

However, on the eve of the meeting, due to an initial agreement to resume shipping through the Strait of Hormuz, international oil prices fell sharply, easing that concern.

Recently, several Fed officials have also expressed similar views.

New York Fed President John Williams said on Tuesday that policy is in an appropriate place and expects the Fed’s preferred PCE inflation rate (currently about 4%) to continue trending down over the coming months as energy prices decline.

San Francisco Fed President Mary Daly said last week in Spain:

“Oil prices are back around $70 per barrel—this is very good news for consumers and for the overall economy.”

However, this optimistic assessment was soon challenged again.

On Wednesday, U.S. President Trump announced that the U.S.-Iran ceasefire has ended. After Iranian attacks on merchant ships, the U.S. military launched airstrikes again. Trump also raised the possibility of taking control of Iran’s oil export hub and reimposing a maritime blockade, making the oil price outlook uncertain once more.

The labor market is no longer the main concern

From September to December last year, the Fed cut rates three times in total. At that time, most officials were willing to tolerate inflation staying slightly above target for a longer period, to avoid further deterioration in the job market and to prevent a fast rise in unemployment that would be hard to reverse.

But in recent months, the job market has stabilized.

Christopher Waller, a Fed governor who had been actively supportive of last year’s rate cuts, said in Rome on Monday:

“Now inflation is picking back up, which naturally changes the way you think about monetary policy.”

The July meeting will face tougher policy trade-offs

Economic resilience remains fairly strong, and new sources of inflation keep emerging, making the Fed’s policy discussions at its July 28 to 29 meeting more complicated.

The June nonfarm payroll data released last week showed employment growth weaker than expected. This means the risk of the labor market overheating again has declined, and it could further support the decision to hold steady.

However, the June CPI data to be released next week will become a new important reference point for officials.

At present, the Fed faces a dilemma:

Although the labor market is no longer an obvious source of inflation, it has also not clearly driven inflation down. Meanwhile, tariffs, oil prices, and the AI investment boom are creating a series of overlapping price shocks, continually testing the Fed’s policy framework of “not reacting to one-off price increases.”

Officials worry that after these factors stack up, they could more deeply affect how households and businesses set wages, pricing, and inflation expectations.

Daly said last week:

“Are these really just one-off shocks that can be overlooked, or will they truly seep into the economic system and change how the economy operates?”

She emphasized that tightening policy too quickly could unnecessarily weigh on the economy, while acting too slowly could entrench inflation. The real difficulty lies in how to strike a balance between the two.

Warsh: The market already understands the Fed’s new communication approach

In a meeting held last week in Portugal, Warsh responded to outside criticism that the Fed lacks communication transparency.

He said investors do not need the Fed to spell out in advance how it will adjust policy in the future.

Warsh pointed out that since the June meeting, the decline in interest rate volatility, the drop in Treasury yields, and stronger market expectations for lower inflation over the next one to two years all show that his communication approach—lowering inflation while maintaining a “constructive ambiguity” in policy strategy—is working.

He said:

“Some people think the market hasn’t understood what I mean, but I think they’ve understood it very clearly.”

Market attention turns to the July 14 CPI data

About a week after the meeting ended, the released May PCE data further intensified concerns about inflation. Headline PCE rose 4.1% year over year, reaching a more than two-year high, driven mainly by energy price shocks from the Iran war; core PCE excluding food and energy also jumped 3.4% year over year.

Market focus is now on the June Consumer Price Index (CPI) data to be released on July 14, and analysts expect that at that time the market will pay particular attention to the inflation trend in non-energy components.

The release date of this data coincides exactly with the date when Warsh testified before the House Financial Services Committee—his first congressional hearing since being sworn in on May 22.