Federal Reserve officials broadly agreed at their meeting last month that they would need to raise interest rates if inflation stays elevated this year. They also agreed that they could stay on hold if price pressures fade soon, according to minutes of that meeting released Wednesday.
Which of those paths they take depends on something they haven't resolved: whether the forces pushing up prices will last.
The minutes showed how they are increasingly focused on a source of inflation that barely figured in their debates a few months ago: the boom in artificial-intelligence investment. It was one of the forces, along with the war in the Middle East and tariffs, that could keep prices elevated and tip the Fed toward a rate hike, according to the written account.
Fed officials voted unanimously at their June 16-17 meeting to hold their benchmark rate in a range of 3.5% to 3.75%, where it has stood since December. They pruned any hints of future policy changes from their policy statement.
Still, investors read last month's meeting, the first under Chairman Kevin Warsh, as a step toward higher rates because of interest-rate projections showing a larger contingent anticipating hikes. Nine of 18 meeting participants penciled in at least one rate increase by December; none had done so in March. Only one anticipated lower rates, down from 12 in March.
Even the most hawkish officials weren't pushing to act. A few participants saw a case for raising rates at the June meeting, according to the minutes, but supported holding -- a sign that the split visible in the projections was less about what to do now than about how the outlook might unfold.
Warsh didn't submit a projection, but his repeated vow to deliver price stability -- with no accompanying signal of patience -- reinforced the impression of a committee leaning toward tightening.
The minutes, released with a three-week lag, showed rising concern over the outlook for inflation. More officials pointed to strong business investment from the AI build-out as a new force that could sustain price pressures. "Several participants commented that price pressures had become more broad based, with a large share of goods and services...experiencing substantial increases," the minutes said.
In the run-up to last month's meeting, a prominent worry was that the Middle East conflict and the higher energy costs it produced could broaden into stickier inflation. That fear receded immediately ahead of the meeting amid a tentative agreement to reopen shipping through the Strait of Hormuz, and oil prices tumbled.
Fed officials have leaned in to the relief. New York Fed President John Williams said Tuesday that policy was well positioned and that he expected the Fed's preferred inflation gauge, which has been running near 4%, to fall "each of the next several months, as energy prices come down." San Francisco Fed President Mary Daly, speaking last week in Spain, called it "very good news for consumers and economies that oil is back near $70 a barrel."
But the premise of lower oil prices faced new questions when President Trump declared the ceasefire with Iran over Wednesday after Iranian attacks on commercial vessels drew fresh U.S. strikes. Trump floated seizing an Iranian oil export hub and reimposing a naval blockade.
Even if Hormuz had stayed settled, price pressures were building from another direction: the AI investment boom. Officials have flagged the surge in spending on data centers and computing power as a source of demand the economy is straining to supply.
Several have noted that a year ago, the Fed could treat tariff-driven price increases as one-off and let them pass through without a policy response because the labor market was soft enough to justify the patience. Now, with hiring steadier and fresh cost pressures arriving from energy and AI at once, that same instinct to wait carries more risk that above-target inflation gets entrenched.
The Fed cut rates three times from September to December last year, with a majority of officials willing to tolerate a slightly longer period of above-target inflation to avoid the risk that a cooling labor market might tip into a faster, self-reinforcing rise in unemployment that is hard to reverse once it begins.
In recent months, the labor market has stabilized, and "inflation's been taking off, so then that changes how you might want to think about policy," Fed governor Christopher Waller, a leading advocate for last year's cuts, said during a panel discussion in Rome on Monday.
The combination of a resilient economy with new sources of price pressure sharpens the debate facing the committee at its July 28-29 meeting. Softer-than-expected payroll figures for June, released last week, suggested less risk of a reaccelerating labor market and could instead reinforce the case for patience. Officials will receive readings on June consumer prices next week.
The Fed faces a dilemma: While the labor market isn't an obvious source of inflationary pressure, it's also not clearly helping to pull inflation down. Tariffs, then oil, and now the AI boom have hit in overlapping waves, each testing the central-bank instinct to look past a one-time price jump. They are raising concerns that, stacked together, they leave a more lasting imprint on how households and businesses set wages and prices.
"Are they simply 'look-through' shocks because they're not meant to last forever, or do they have some fundamental way in which they bleed into the economy and change things?" Daly, the San Francisco Fed president, said last week. Acting too quickly might slow down an economy that doesn't need to be reined in, but acting too slowly could let inflation fester. "Those are the balancing acts," she said.
At a conference in Portugal last week, Warsh dismissed complaints that investors need a clearer sense of how the Fed would adjust as the outlook changes. He pointed to changes in several market measures after last month's meeting -- falling interest-rate volatility, lower Treasury yields and expectations that inflation would decline over the coming year or two -- as evidence that his pledge to lower inflation while maintaining constructive ambiguity about the Fed's tactics is succeeding.
"I hear this as if people don't understand," he said. "I think they actually understand quite well."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
July 08, 2026 15:27 ET (19:27 GMT)
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