Fed Officials Floated A Rate Hike In June, Minutes Show

The Federal Reserve is growing increasingly worried about inflation.

A sizable cohort of Fed members are cooling to the prospect of near-term interest rate cuts as inflation remains well above the central bank’s long-held target and the labor market — the other side of the central bank's dual mandate — remains stable, according to minutes from the Fed’s meeting last month released Wednesday.

The Fed minutes are anonymous and nonspecific, using terms like “most,” “many,” “some” or “a few” to describe consensus among the committee without giving specific counts of votes. The result is a somewhat nebulous reporting of the meeting, but one that offers insight into the debates inside the room. 

While the majority of Fed members continue to believe that medium- and longer-term inflation expectations remain at levels consistent with the central bank’s 2% target rate, several members highlighted concerns about entrenched inflation seeping broadly into goods and a few said there was a case to be made for raising rates at the June meeting. 

The anonymous meeting minutes reflect feelings among some Fed members that monetary policy isn’t significantly impacting capital markets.

“Several participants remarked that they did not see the current policy stance as restrictive, while a few other participants commented that they saw the current policy stance as slightly restrictive,” the minutes say.

The commentary, a marked shift from the readout of April’s meeting, suggests that most of the Fed’s governors and presidents see the current federal funds rate at or below neutral. That opens room for rate hikes.

Some members argued that “there was a case for raising the target range for the federal funds rate, but those participants indicated that they supported maintaining the current target range at this meeting,” the minutes say.

The debate comes as the yield for 10-Year U.S. Treasury bonds clear the 4.5% threshold that many economists have cited as creating refinancing challenges for pandemic-era debt. Yields first passed the threshold in May before retreating, but have bounced back as fighting between the U.S. and Iran picked back up around the Strait of Hormuz this week. 

Rate cuts don't happen in a vacuum, and the shifting macroeconomic picture has eroded some of real estate's attractiveness as an inflation hedge, and investors are grappling with the notion that it may take an economic slowdown to push the Fed to ease monetary policy.

The Federal Open Market Committee’s decision to keep rates flat last month was its first unanimous vote since last June and was also the first with Chairman Kevin Warsh at the helm.

He took over from Jerome Powell, who remains a voting member of the FOMC after a final year in the top post that was marked by attacks from President Donald Trump and his allies over a perceived unwillingness to cut rates that escalated into what some called unprecedented political interference in monetary policy. 

Warsh’s most immediate public-facing impact has been on the Fed’s postmeeting statement, which was slashed to a 132-word statement from what had been a comparatively robust discussion of where the Fed saw macroeconomic conditions. 

It was also notable in its tonal shift, with the statement ending with a pledge that was missing, but implied, in Powell's tenure. “The Committee will deliver price stability,” it says.

Warsh has promised reforms at the central bank — he has launched five task forces designed to examine and potentially reshape every facet of Fed bureaucracy — and was widely viewed as amenable to easing interest rates when he was nominated to the post by Trump in January.

But financial projections released with the first rate decision under his leadership in June showed that Fed officials are drifting in the other direction, and Wall Street now forecasts a 30% chance of a rate hike at the central bank’s meeting later this month. 

In forecasts from the June meeting, half the 18 members of the FOMC projected rates will rise, eight expect them to remain flat, and one member projects a single cut. 

Central bankers noted that the 3.8% reading in April for the personal consumption expenditures index, the Fed’s preferred inflation metric, was far off its 2% target and moving in the wrong direction as the economy reacts to tariffs, the U.S. war with Iran and the rise of artificial intelligence. The Fed calculated that PCE inflation for May was 4.1%.

FOMC members were split on the near-term direction of inflation but remain unified that medium- and longer-term inflation is tracking toward 2%. The pace of price hikes is expected to slow in the back half of the year before stepping down in 2027 and reaching target in 2028, the minutes say. 

“With inflation having run significantly above 2 percent over the past five years and in light of some emergent price pressures that appeared unrelated to tariffs or energy prices, the staff continued to view the possibility that inflation would be more persistent than projected as a salient risk,” the minutes say.

While the majority of participants expect inflation will begin to dissipate, laying the groundwork for a lower target Fed funds rate, they also considered scenarios where inflation remains elevated in the face of a stable labor market, AI-driven productivity, tariff-related price increases and volatility from conflict in the Middle East. 

“In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted” to help control inflation, the minutes say.

The focus on inflation comes as the labor market remains healthy from the perspective of the majority of Fed members, who expect conditions to remain stable in the near term, with unemployment remaining close to current levels despite some predictions about AI replacing jobs.

“Participants generally noted that the strength in business investment remained concentrated in AI-related expenditures, which showed no signs of slowing,” the minutes say, with Fed members generally expecting solid economic growth through the end of the year.

Elevated commodity prices and other inflationary pressures weighing on growth have been more than offset by strong AI business investment, which could fuel further inflation, the minutes say.

Still, the majority of members said “considerable uncertainty surrounded their inflation outlook.”