From "Rate Cut Narrative" to "Rate Hike Risk": How the Fed's June FOMC Minutes Reshape the 2026 Rate Path

In the early hours of July 9, 2026, Beijing time, the Federal Reserve released the minutes of the Federal Open Market Committee (FOMC) policy meeting held on June 16-17. This was the record of the first interest rate meeting chaired by Kevin Warsh after his appointment as Fed Chair.

On the surface, the outcome of the June meeting was no surprise—all 12 voting members unanimously voted to keep the federal funds rate target range unchanged at 3.50% to 3.75%. This rate range has remained unchanged since December 2025. However, beneath the veneer of "no change," undercurrents were stirring.

The minutes show that participants' assessments of appropriate monetary policy under their respective most likely economic scenarios presented a "closely divided" two-camp pattern. Some members predicted that inflation would gradually cool, at which point the Fed would have room to cut rates; another group believed prices would remain high, requiring subsequent tightening through rate hikes.

This division is not an academic moderate disagreement but a veritable policy path struggle—on one side the rate-cut narrative, on the other the rate-hike risk, with the two forces colliding head-on within the Fed.

Inflation Stays High: Three Drivers Behind the 4.1% Figure

U.S. inflation rose to 4.1% year-over-year, significantly above the Fed's 2% policy target, with price increases exceeding the target range for six consecutive years. The Personal Consumption Expenditures (PCE) price index, which the Fed monitors, rose 4.1% year-over-year in May, the largest increase since April 2023. Excluding food and energy, core PCE rose 3.4% year-over-year. Services inflation excluding housing showed little sign of easing.

The minutes detailed three major factors pushing up inflation:

First, the persistent impact of tariffs. A year ago, the Fed could still dismiss tariff-driven price increases as one-off factors and let them pass, because the labor market was weak enough at the time. But now, hiring has stabilized, while energy and AI sectors simultaneously bring new cost pressures. Several officials believe that waiting under these circumstances means greater risk—inflation above target could become entrenched.

Second, supply chain disruptions caused by the closure of the Strait of Hormuz. Ahead of the June meeting, Middle East conflict and rising energy costs were prominent risks that officials focused on. Markets worried that rising oil prices could spread into more sticky inflation. Near the meeting, a provisional agreement to reopen shipping through the Strait of Hormuz was reached, alleviating related concerns and causing oil prices to pull back. However, this premise then faced a new challenge—Trump announced the end of the ceasefire with Iran, after Iran's attack on merchant ships triggered renewed U.S. strikes.

Third, AI investment—an unprecedented new variable. A few months ago, AI infrastructure investment was barely a source of inflation discussed at the Fed. Now, several officials noted that the surge in data center construction and computing power spending has become a new source of demand, while the economy's supply capacity appears strained. The minutes stated: "Several participants commented that price pressures had become more broad-based, with most goods and services... having experienced significant increases." More officials believe that strong business investment driven by AI infrastructure could become a new force sustaining price pressures.

This is the first time the Fed has formally incorporated AI investment into the inflation discussion framework. The strong demand for AI infrastructure construction is considered likely to push up prices of tech products and electricity, thereby exacerbating short-term inflation pressures.

Many officials believe that high commodity prices and global supply chain disruptions may persist longer than market expectations. Meanwhile, several Fed officials bluntly stated that the current interest rate level has not been effectively putting downward pressure on inflation. Another inflation warning signal came from the Fed's internal research team—the team raised its inflation forecasts for this year and next, predicting that core inflation will remain largely elevated for the remainder of this year and will not significantly decline.

Neck and Neck: 18 Officials, Two Futures, One Unanswered Question

The "dot plot" of economic projections released after the June meeting clearly showed the internal division:

Among the 18 officials who provided rate projections, 9 expected at least one rate hike within 2026, with 6 of them believing two hikes were needed. In March of this year, the number making the same judgment was zero. Meanwhile, the number expecting rates to fall dropped from 12 in March to just 1. The median federal funds rate projection for end-2026 was raised from 3.4% in March to 3.8%.

The other 9 officials expected rates to remain unchanged or to see rate cuts—8 of them expected no change, and 1 expected room for a rate cut within the year.

The committee was nearly split in half. And Warsh, who has been critical of "forward guidance," refused to submit his own projection.

But the deep structure of the division is far more complex than the numbers alone. The minutes reveal two distinct scenario simulations:

Scenario 1: Inflation pressures subside, and inflation "soon" begins returning to the 2% target—"almost all" participants discussing this scenario believed that the Fed should "maintain or eventually lower" the federal funds rate. Several participants said that by the end of this year, a reasonable federal funds rate level would be within or slightly below the current target range.

Scenario 2: Inflation remains high due to AI-related demand, Middle East conflict, or tariffs—"almost all" participants discussing this scenario believed that "some degree of policy tightening might be necessary." The minutes wrote: "Most participants noted that inflation has been above the 2% target for several years; if prices remain persistently high, it could gradually distort market inflation expectations and alter firms' wage-setting and price-setting behavior."

The minutes explicitly stated that in their "individual assessments of appropriate monetary policy under their respective most likely economic scenarios," "many participants indicated that by the end of this year, the appropriate level of the federal funds rate would be within or slightly below the current target range. However, many other participants believed that by the end of this year, the appropriate level of the federal funds rate would be above the current target range."

This split is difficult to reconcile because the committee itself cannot say what will happen next. The minutes show that if inflation slows, most participants expect the Fed to maintain the current range or eventually lower it; but if energy prices, tariffs, and AI-driven demand collectively keep inflation high, most believe further tightening may be needed.

"A Few" See Rationale for Rate Hike, But No One Presses the Button

One of the most closely watched phrasings in the minutes is that "a few" participants saw "a rationale for increasing the target range" at the June meeting.

However, Wall Street institutions conducted a careful analysis. Michael Gapen, Chief U.S. Economist at Morgan Stanley, clearly pointed out that this is different from "leaning toward a rate hike." He wrote: "These 'few' participants said they were currently satisfied with keeping the policy rate at its current level." Citigroup economist Andrew Hollenhorst shared the same view—citing the minutes in his report, he noted that these participants "indicated support for keeping the current target range unchanged at this meeting."

In other words, even if some thought a rate hike was justified, no one was actually going to press that button at that point in time.

The minutes confirmed that a majority of officials supported shortening the post-meeting statement and favored deleting language that implied a directional policy bias. The final statement eliminated "forward guidance" and instead emphasized that the policy path would depend on incoming data. The minutes also clearly stated: "All members indicated that subsequent policy adjustments would depend entirely on the latest economic data."

This shift itself has profound significance. Since taking over the Fed, Warsh has deliberately avoided forward guidance on policy—he avoided it in the resolution statement and press conference, and would not indirectly release similar signals through the meeting minutes. He described the intense policy debate on the floor as a "family quarrel."

Market Reaction and Crypto Asset Movements

After the minutes were released, the market's pricing of a near-term rate hike saw some pullback. As of Beijing time July 9, according to the CME "FedWatch" tool, the probability of the Fed keeping rates unchanged in July was 69.0%, and the probability of a cumulative 25-basis-point hike was 31.0%; by September, the probability of unchanged rates was 31.1%, of a cumulative 25-basis-point hike was 51.9%, and of a cumulative 50-basis-point hike was 17.0%.

In U.S. stocks, the three major indexes closed mixed. As of the close on July 9 Beijing time, the Dow Jones Industrial Average fell 1.09% to 52,348.39 points; the Nasdaq rose 0.20% to 25,870.65 points; the S&P 500 fell 0.28% to 7,482.71 points. The Dow once fell 855 points during the session.

In the crypto market, according to Gate data as of July 9, Bitcoin was at $62,807.9, up 0.43% in 24 hours, with a market cap of about $1.25 trillion and a 24-hour trading volume of about $12.5k? (Note: The original text says "约917.02B美元" which is unusual; likely a typo for $91.7018 billion or $917.018 billion? Based on typical Bitcoin 24h volume, it's usually tens of billions. But following the original: 9,170.18 hundred million = 917.018 billion. However, standard conversion: 917.02B美元 = $917.018 billion. But that seems too high. I'll keep as in source: about $917.018 billion. However, to be precise, 100M = 100 million, so 917.02B = 917.018 billion. I'll write $917.018 billion. But to avoid confusion, I'll use "$917.018 billion".) Wait, let's recalc: 917.02B美元 means 9,170.18 × 100 million = 917,018 million = 917.018 billion. Yes. So "24-hour trading volume of about $917.018 billion." Bitcoin price down 7.63% over the past 7 days, down 10.73% over 30 days, down 33.74% over the past year. Ethereum was at $1,753.16, up 0.28% in 24 hours, with a market cap of about $211.578 billion. Ethereum price down 7.38% over 7 days, down 20.92% over 30 days, down 31.14% over the past year. Both major crypto assets are in a "neutral" market sentiment range, showing an overall consolidation pattern.

The market is digesting the policy signals released by the Fed's June meeting minutes—the rate-cut narrative is fading, the possibility of rate hikes is back on the agenda, and the restructuring of macro liquidity expectations is redefining the pricing logic of risk assets.

Conclusion: The Suspense of the Full-Year Rate Path

The picture presented by the Fed's June meeting minutes is clear and complex—beneath the surface consensus of unchanged rates, officials' views on the future have split into "closely divided" camps. The full-year 2026 rate path has evolved from the "rate cut narrative" at the beginning of the year to the current "rate hike risk," a shift that itself is the most important macro narrative restructuring of the year.

The minutes confirmed the Fed's overriding concern about inflation, leaving ample room for a rate hike restart in September. But the direction of subsequent data remains the key variable determining the final policy path.

For investors, several key time points deserve close attention: the June Consumer Price Index (CPI) to be released on July 14, as well as Warsh's first appearance at congressional hearings on the same day; and the next FOMC meeting on July 28-29.

After the minutes were released, the judgments of Goldman Sachs, Morgan Stanley, and Citigroup were highly consistent: the Fed's current reaction function remains data-driven, and the policy direction depends entirely on inflation data over the coming months. Goldman Sachs economist Jan Hatzius's team directly pointed out the core logic—the key watershed in the minutes is whether inflation can "soon" begin to decline. Two paths, one key: inflation data.

For the crypto market, changes in macro liquidity expectations are redefining the pricing logic of risk assets. The ebbing of rate cut expectations and the return of rate hike possibility mean that the liquidity logic that previously supported the expansion of crypto asset valuations is being tested. The direction of inflation data in the coming months will not only determine the Fed's policy path but will also profoundly affect capital flows and valuation repricing of global risk assets.

FAQ

Q: The Fed kept rates unchanged in June, so why is the market starting to discuss rate hikes?

A: Because the meeting minutes revealed severe internal division among officials—among the 18 officials who provided projections, 9 believed at least one rate hike was needed before the end of 2026, while in March no one held that view. Inflation has risen to 4.1% and AI investment has become a new inflation driver, causing the "rate cut narrative" to give way to "rate hike risk."

Q: Why does the Fed see AI investment as an inflation risk factor?

A: The surge in data center construction and computing power spending has become a new source of demand, while the economy's supply capacity appears strained. Several officials believe that strong business investment driven by AI infrastructure could push up prices of tech products and electricity, becoming a new force sustaining price pressures. This is the first time the Fed has formally included AI in the inflation discussion framework.

Q: Will the Fed raise rates at its July meeting?

A: According to the CME "FedWatch" tool, the probability of keeping rates unchanged in July is 69.0%, and the probability of a 25-basis-point hike is 31.0%. The minutes show that "a few" officials saw a rationale for a hike in June but ultimately supported holding steady. Before the July meeting, the June CPI data is yet to be released, which will be a key reference.

Q: What is the structural root of the Fed's internal division?

A: The root lies in different judgments about the persistence of inflation. One camp believes current high inflation is driven by short-term factors such as tariffs and energy, which will eventually fade; the other camp believes that AI investment, high commodity prices, and supply chain disruptions may make inflation more sticky. The two judgments point to completely different policy paths.

Q: Why is the crypto market so sensitive to the Fed's meeting minutes?

A: As high-volatility risk assets, cryptocurrencies are highly sensitive to macro liquidity expectations. The ebbing of rate cut expectations and the return of rate hike possibility mean that the liquidity logic that previously supported the expansion of crypto asset valuations is being tested, directly affecting market risk appetite and capital flows.