By Howard Schneider
WASHINGTON, July 8 (Reuters) – Concern about high inflation mounted at the U.S. central bank’s meeting last month, as officials followed Federal Reserve Chairman Kevin Warsh’s lead to a more stripped-down policy statement even amid concerns that price increases were broadening and might require interest rate hikes.
A “few participants” at the June 16-17 meeting said there was already a case to raise borrowing costs, even though they ultimately agreed with their colleagues to hold rates steady “at this meeting.”
The broader debate, however, seemed evenly divided, minutes of the session showed on Wednesday, with “most participants” seeing a scenario in which inflation would fall towards the Fed’s 2% target on its own, but also one in which it would remain high. “Almost all” of that latter group considered a rate increase as necessary if higher inflation persisted.
It was clear from the readout that inflation dynamics were unsettling for a number of policymakers, with new concerns such as the inflationary impact of booming investments in artificial intelligence introduced into the debate.
“Participants generally assessed that information received over the inter-meeting period suggested that upside risks to price stability remained elevated while downside risks to achieving maximum employment had moderated a bit,” the minutes said.
“Several participants commented that price pressures had become more broad-based, with a large share of goods and services — including transportation, air fares, petrochemical products, and agricultural inputs — experiencing substantial increases … Several participants remarked that services price inflation excluding housing had declined little and remained high,” the minutes said.
Though some Fed analysts had expected Warsh might lead an overhaul of the minutes as well, the format generally remained the same. The document, however, was about 1,000 words, or 20%, shorter.
Some of the brevity may have come from the narrowing of policy views into two camps, one seeing inflation likely to pass on its own and one feeling that rate hikes may be needed to control it, compared to the more diffuse set of views at the Fed’s April 28-29 meeting, the last under then-Fed chief Jerome Powell. That meeting saw the most dissents in several decades, with support for possible rate hikes just starting to take root, while former Fed Governor Stephen Miran continued to advocate for immediate rate cuts.
There was no mention of support for an immediate rate cut in the minutes of Warsh’s first meeting as head of the central bank.
‘SOME AMBIGUITY IN THE MINUTES’
Market reaction to the release of the minutes was muted, with U.S. stocks barely budging, yields on Treasuries slightly paring earlier increases, and interest-rate futures maintaining bets the central bank’s policy-setting Federal Open Market Committee will deliver a rate hike by its September 15-16 meeting.
“There’s some ambiguity in the minutes, suggesting several competing views on policy,” Jeffrey Roach, chief economist at LPL Financial, wrote in a note after the release of the minutes. “One thing is certain: future policy is heavily contingent on the political situation in the Middle East. If we can tease out any forward guidance from the minutes, it would be the committee is working through a wide range of scenarios and will not commit to a specific scenario until the incoming data provides necessary clarity.”
The policy debate and decision formed only one aspect of the discussion at the meeting last month.
Policymakers also considered Warsh’s proposal to end “forward guidance” and provide less commentary in the statement on coming rate decisions.
“A majority of participants remarked that they saw advantages in shortening the statement,” the minutes said, while “most participants” supported removing language indicating the Fed’s next policy move would likely be a rate cut.
The alternative approved by the Fed in June removed guidance about rates altogether, in alignment with Warsh’s overall desire to avoid making promises about rate decisions.
The minutes also noted that Warsh described his plan to establish five task forces to examine how monetary policy is conducted, but do not indicate any discussion of it.
The Fed left its benchmark interest rate unchanged in the 3.50%-3.75% range at the June meeting, though new projections revealed a growing sentiment around a likely rate hike this year, with nine of 18 policymakers seeing rates slightly higher by the end of 2026.
The meeting was attended by Warsh’s two new special advisers, Paul Winfree and Daniel Heil.
(Reporting by Howard Schneider; Additional reporting by Ann Saphir; Editing by Paul Simao)
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