Fed Minutes: AI Ranks Among Top Three Inflation Risks, Some Officials Back June Rate Hike

According to reports from Nick Timiraos, a journalist for The Wall Street Journal known as the "New Fed Correspondent", the minutes of the Federal Reserve's meeting last month show that officials generally agreed that if inflation remains high this year, further interest rate hikes will be needed; if price pressures ease quickly, the central bank can keep rates unchanged.

The meeting minutes reveal that policymakers are increasingly focusing on a new source of inflation that was barely mentioned in discussions just a few months ago — the artificial intelligence (AI) investment boom. The minutes note that the expansion of AI investment, conflicts in the Middle East, and tariff policies together form key factors that could keep inflation elevated and prompt the Fed to raise interest rates.

At its meeting held June 16-17, the Federal Reserve voted unanimously to maintain the federal funds rate target range at 3.5% to 3.75%, a level that has remained unchanged since last December. Meanwhile, the policy statement removed any explicit hints about the future direction of monetary policy.

Nevertheless, markets interpreted this meeting — the first FOMC meeting under Chair Warsh — as a relatively hawkish signal, as the newly released interest rate projections showed a notable increase in the number of officials supporting rate hikes.

Among the 18 meeting participants, 9 expected at least one interest rate hike by the end of the year, compared to zero who made such a forecast in March this year; meanwhile, only 1 official projected a rate cut in 2025, a sharp drop from the 12 who expected cuts in March.

Currently, amid persistent volatility in the Middle East, oil prices have fluctuated drastically, making the inflation outlook more complex. Trump stated on Wednesday morning that he believed the U.S.-Iran ceasefire had ended, and the United States might launch further strikes against Iran. Driven by this news, market investors projected earlier that day that the Federal Reserve would raise interest rates 1 to 2 times this year.

01

A Small Group of Officials Argued for a Rate Hike in June, But Ultimately Supported Holding Rates Steady

Even the most hawkish officials did not advocate for immediate action at the time.

The meeting minutes show that a small number of participants believed there was sufficient justification to raise interest rates at the June meeting, but ultimately supported keeping rates unchanged. This means the divisions reflected in the dot plot primarily reflect differing assessments of the future economic outlook, rather than disagreements over immediate policy actions.

While Chair Warsh did not submit an interest rate projection himself, he repeatedly emphasized the importance of restoring price stability and did not send any signals of being "patient", further reinforcing the market's perception that the Fed's overall stance leans toward additional policy tightening.

02

AI Investment Emerges as a Major Inflation Risk for the First Time

The meeting minutes, typically released three weeks after the gathering, indicate that officials' concerns about the future trajectory of inflation have deepened.

Compared to previous meetings, more officials for the first time cited the corporate investment surge driven by AI infrastructure construction as a new source of persistent inflation.

The meeting minutes noted:

"Multiple participants stated that price pressures have become more broad-based, with notable increases observed across the prices of many goods and services."

Several officials pointed out that the large-scale construction of data centers and continuous expansion of computing power infrastructure have created a new demand shock for the U.S. economy, which supply capacity is struggling to keep pace with.

Many officials noted that a year ago, the Federal Reserve could view price increases caused by tariffs as a one-off shock and refrain from rushing to respond with policy actions, as the labor market was sufficiently weak at the time to allow for greater patience.

Today, however, the labor market has stabilized, and rising energy prices combined with the AI investment boom are pushing up costs simultaneously. This means that continuing to "wait and see" could increase the risk of inflation remaining above target over the long term.

03

Persistent Volatility in the Middle East Clouds the Inflation Outlook

Prior to the meeting, the Federal Reserve paid close attention to the possibility that conflicts in the Middle East could drive up energy prices and evolve into more persistent inflation.

However, on the eve of the meeting, international oil prices fell sharply following the preliminary agreement to restore shipping through the Strait of Hormuz, which somewhat alleviated these concerns.

Recently, multiple Federal Reserve officials have expressed similar views.

New York Fed President John Williams said on Tuesday that monetary policy is currently in an appropriate position, and he expects that as energy prices decline, the Fed's preferred PCE inflation rate (currently around 4%) will continue to fall over the coming months.

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

"Oil prices returning to near $70 a barrel is very good news for consumers and the broader economy."

However, this optimistic assessment was soon challenged again.

On Wednesday, U.S. President Trump announced that the U.S.-Iran ceasefire had ended. After Iran attacked commercial vessels, the U.S. military launched new airstrikes. Trump also raised the possibility of seizing Iran's oil export hubs and reimposing a maritime blockade, once again injecting uncertainty into the outlook for oil prices.

04

The Labor Market Is No Longer a Primary Concern

From September to December last year, the Federal Reserve cut interest rates three times in total. At that time, most officials were willing to tolerate inflation running slightly above target for an extended period to avoid further deterioration in the labor market and prevent a rapid, irreversible surge in unemployment.

In recent months, however, the labor market has stabilized.

Fed Governor Christopher Waller, who was an active supporter of last year's rate cuts, stated in Rome this Monday:

"Now that inflation is rearing its head again, that naturally changes how you think about monetary policy."

05

The July Meeting Will Face a More Difficult Policy Decision

The U.S. economy remains relatively resilient, while new sources of inflation continue to emerge, making the policy discussion at the Fed's July 28-29 meeting more complex.

The June non-farm payrolls data released last week showed that employment growth was weaker than expected, which reduces the risk of the labor market overheating again and could further support keeping interest rates unchanged.

Nevertheless, the June CPI data scheduled for release next week will serve as a new critical reference point for officials.

Currently, the Federal Reserve is in a dilemma:

While the labor market is no longer an obvious source of inflation, it is not driving inflation down meaningfully either. At the same time, tariffs, oil prices, and the AI investment boom are creating successive, overlapping price shocks that continuously test the Fed's policy framework of "looking past one-off price increases".

Officials worry that the combination of these factors could more profoundly influence how households and businesses set wages, prices, and shape their inflation expectations.

Daly said last week:

"Are these just one-off shocks that can be ignored, or will they truly permeate the economic system and alter how the economy functions?"

She emphasized that tightening policy too quickly could unnecessarily drag down the economy, while acting too slowly could allow inflation to become entrenched. The real difficulty lies in striking the right balance between the two.

06

Warsh: Markets Have Actually Understood the Fed's New Communication Approach

At a conference held in Portugal last week, Warsh responded to external criticism that the Federal Reserve lacked transparency in its communications.

He stated that investors do not need the Federal Reserve to explicitly outline 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 pullback in U.S. Treasury yields, and the strengthening of market expectations for lower inflation over the next 1 to 2 years all demonstrate that his communication strategy — which prioritizes reducing inflation while maintaining "constructive ambiguity" in policy approach — is working as intended.

He said:

"Some people suggest the market hasn't understood me, but I believe they actually understand my message very clearly."

07

Markets Are Focused on the July 14 CPI Release

About a week after the meeting concluded, the May PCE data released further intensified inflation concerns. The headline PCE index rose 4.1% year-over-year, a new high in more than two years, driven primarily by the impact of the Iran conflict on energy prices; core PCE, which excludes food and energy, also jumped 3.4% year-over-year.

Market attention is now fixed on the June Consumer Price Index (CPI) data scheduled for release on July 14, with analysts expecting the market to focus closely on the inflation trajectory of non-energy components.

The release date of this data coincides exactly with Warsh's scheduled testimony before the House Financial Services Committee — which will be his first congressional hearing since he was sworn in on May 22.

This article is from the WeChat public account "Wall Street CN", authored by Yang Chen, and published with authorization from 36Kr.