Fed minutes show several officials favored July rate hike as inflation risks stayed elevated

Federal Reserve officials showed growing support for tighter monetary policy at their July meeting, with several participants favoring a 25 basis point rate increase and many warning that further tightening could be necessary if inflation remained elevated.

The Federal Open Market Committee ultimately voted to keep the federal funds rate at 3.5% to 3.75%. Three members voted against the decision and preferred a 25 basis point increase.

Officials generally agreed that economic activity continued to expand at a solid pace and labor market conditions remained stable, while inflation stayed above the Fed’s 2% target. 

Several participants who supported an increase said price pressures appeared broad based and argued for a more restrictive policy stance.

Many participants said additional policy tightening would likely be necessary if inflation did not decline. Some also questioned whether financial conditions were restrictive enough to bring inflation back toward the Fed’s target.

Inflation risks remained tilted to the upside, with officials pointing to the conflict in the Middle East, tariffs, energy prices, and demand from the AI buildout as sources of price pressure. 

Several participants said AI investment was already pushing up aggregate demand or could begin doing so soon.

The minutes also showed increasing concern around financial risks tied to the rapid expansion of AI infrastructure. Some participants warned that a significant reassessment of AI companies’ earnings prospects could trigger broader asset repricing and tighter financial conditions. 

Officials also noted that a growing share of AI capital spending was being financed with borrowing.

At the time of the meeting, markets were pricing in a roughly one in three chance of a July rate increase and fully pricing a 25 basis point increase by the September meeting. The median respondent to the Fed’s market survey, however, expected rates to remain unchanged through 2027.

As of press time, CME FedWatch showed a 34.4% probability of a rate increase at the Fed’s September meeting and a 65.6% probability that rates would remain unchanged.

The Fed’s next scheduled policy meeting is set for September 15 and 16.

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