The latest Fed minutes have highlighted the risk that AI demand could have on inflation as the Fed continues to hold rates steady. The minutes also signaled that a hike is still on the cards if inflation remains elevated and fails to fall to the 2% target.
Fed Minutes Flag Inflation Risk Driven By AI Demand
The Federal Reserve minutes from the June FOMC meeting highlighted multiple scenarios regarding the outlook for monetary policy. Most participants pointed to scenarios in which the labor market remains stable while inflation remains elevated due to strong AI-related demand, the Middle East conflict, or the effects of tariffs.
In such scenarios, almost all of the participants indicated that some policy firming would be necessary to return to their 2% target. Furthermore, the Fed minutes showed that most participants commented on scenarios in which inflationary pressures could ease, and inflation could begin to return to the 2% target.
In such scenarios, almost all the participants said that it would likely be appropriate to maintain or eventually lower the federal funds rate. As CoinGape reported, the Fed left interest rates unchanged at the June FOMC meeting, which was also Kevin Warsh’s first meeting as Fed chair.
Meanwhile, in their individual assessment of what monetary policy could look like, many participants indicated that the appropriate federal funds rate would be within or slightly below the current target range by year-end. Many other participants said that it would be appropriate for the federal funds rate to be above the current range at the end of the year.
Rate Hike Still A Possibility
Market participants notably continue to price in a Fed rate hike by year-end. Polymarket data show that the odds of a rate hike this year are 59%. The odds have climbed this week following the latest escalation in the U.S.-Iran war, with President Trump threatening fresh strikes against Iran.
The Fed minutes showed that a few participants said there was a case for hiking rates, as upside risks to inflation remain elevated while downside risks to the labor market have moderated a bit. However, those participants indicated support for maintaining the current target range at the June FOMC meeting.
CME FedWatch data shows that the Fed is still likely to keep rates unchanged at the July FOMC meeting, with a 69.5% chance of that happening. However, it is worth noting that the odds have fallen from as high of 80% over the past week. There is currently a 30.5% chance that the Fed will hike rates at that meeting.
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