Fed Likely Hiking Interest Rates Unless Inflation Comes Down, Minutes Show

Federal Reserve officials indicated interest rates would likely need to rise unless inflation improves, though they acknowledged the outlook for consumer prices remains “highly uncertain,” according to minutes from the central bank’s July meeting released Wednesday.

During the Federal Open Market Committee’s July meeting, in which officials voted 9-3 to hold interest rates between 3.5% and 3.75%, “many” participants indicated a rate hike would “likely be necessary if inflation did not decline.”

Officials’ inflation outlooks were “highly uncertain,” and a re-escalation of the Iran war “clouded” their projections, according to the minutes.

There appeared to be some disagreement over how inflation would change through the rest of the year: “Most” participants anticipate consumer prices to steadily cool, whereas “many” acknowledged the “possibility that inflation might be more persistently elevated.”

The three regional Federal Reserve presidents who dissented in favor of a quarter-point interest rate hike, including Cleveland’s Beth Hammack, Dallas’ Lorie Logan and Minneapolis’ Neel Kashkari, did so because they believed raising interest rates could prevent the central bank from having to hike rates much more aggressively later, according to the minutes.

Fed Chair Kevin Warsh “observed” that cutting the Federal Open Market Committee’s meeting schedule from eight to six each year, with votes “held roughly every two months,” the minutes said. Warsh indicated this could provide policymakers more time to “consider strategic monetary policy issues” and review more economic reports. Warsh requested input from other officials, but no decision about scheduling changes was made.

34.6%. Those are the odds markets placed on an interest rate hike at the Fed’s September meeting, according to CME Group’s FedWatch tool. Those odds jump to 68.4% by December, before hitting 82.2% by April 2027.

Warsh and other Fed officials have said the central bank’s focus is on “restoring price stability,” after inflation surged amid a conflict in the Middle East earlier this year. Consumer prices briefly cooled in June during a brief peace deal between the U.S. and Iran, with inflation dropping in the largest month-to-month decline since April 2020, but a back-and-forth between the two countries has prevented oil prices from remaining at a lower level. Inflation rose at a 3.4% annual rate in July, according to federal data published last week, and some economists argued the rise in prices wasn’t enough to push the central bank toward an interest rate hike. Morgan Stanley Wealth Management chief economist Ellen Zentner said in emailed comments the latest inflation report would keep the “no need to hike rates” narrative alive for the Fed.