FOMC Minutes: Fed Shifts to Neutral Wait-and-See Stance, a Few Officials See Need to Raise Rates, Upside Inflation Risks Become Core Conflict

The Federal Reserve released the minutes of its June 16-17 FOMC monetary policy meeting on July 8. The document indicates that the Fed has completely shifted to a neutral, wait-and-see stance, with upside inflation risks becoming the core contradiction.

This FOMC meeting sent a clear signal that the Fed has completely moved away from its previous unilateral rate-cut bias and entered a two-way, flexible policy observation period. Higher-than-expected inflation stickiness and its broadening scope are the core reasons for this policy shift, while the resilience of employment and growth provides the policy with room for flexible adjustments.

Officials confirmed further increases in inflation, noting that pressures are no longer confined to exogenous factors like energy and tariffs. Instead, broad categories such as transportation, airfares, and oil prices are rising in tandem, with supercore service inflation (excluding housing) showing virtually no improvement. In the short term, inflation is expected to decline gradually as shipping through the Strait of Hormuz recovers and marginal tariff effects fade.

However, the duration of supply chain disruptions could exceed expectations, and ongoing AI infrastructure development continues to push up computing power and electricity costs, both of which could prolong the period inflation remains elevated.

The labor market remains highly resilient, with the unemployment rate stable at the natural rate of interest, and nonfarm payrolls matching labor force growth, significantly easing previous market concerns over worsening employment. Current wage growth is consistent with the 2% inflation target, meaning the labor market is not the source of inflationary pressure. Geopolitical uncertainty and the long-term substitution effect of AI remain the only potential risk factors on the employment side.

The core driver of economic growth is highly concentrated in AI investment. Corporate AI capital expenditures continue to beat expectations with no signs of slowing down, serving as both the core engine of current growth and a long-term catalyst to raise potential output levels. Overall financial conditions remain somewhat loose, with rising stock prices supporting consumption among high-income groups; however, pressure on low-income groups continues to intensify, making them highly dependent on credit to sustain spending and more vulnerable to the impact of rising prices for essential goods. The conflict in the Middle East is the largest source of uncertainty for the growth outlook.

On monetary policy, all members held rates steady at this meeting, but internal divisions have begun to emerge. A minority of officials believed there was already a case for a rate hike but chose to hold off for now; assessments of the policy stance also diverged, with some officials viewing current policy as not tight, and a minority seeing it as slightly restrictive.

Overall, officials' assessment of the policy path remains data-dependent, suggesting they could hold or cut rates if inflation falls smoothly, or hike further if inflation remains persistently high. Officials are split fifty-fifty on the interest rate path for the end of the year, with no unified easing bias remaining.

Notably, participants reviewed a proposal by Fed Governor Warsh to terminate "forward guidance" and reduce commentary on future interest rate decisions in the statement. "Most participants noted that they saw advantages to shortening the statement," the minutes said, while "most participants" supported removing language suggesting that the Fed's next policy move would likely be a rate cut. The alternative approved by the Fed in June completely removed guidance on interest rates, in line with Warsh's general desire to avoid making commitments regarding rate decisions.