Fed minutes: inflation above target, rate hike on the table

The US central bank, the Federal Reserve, kept interest rates unchanged in July 2026, but the minutes of that meeting show that the discussion was anything but unanimous. Several policymakers argued for a 25 basis point rate hike, while the majority preferred to hold. Inflation remains well above the 2% target, and the risks, according to the Fed, are still tilted to the upside.

In short:

• The Fed kept interest rates unchanged in July, but several members wanted a 25 basis point hike.
• Total PCE inflation stood at 4.1% in May and fell to an estimated 3.7% in June.
• The Fed warns of financial risks around high valuations and debt in the AI sector.

Inflation stubbornly high due to tariffs and Middle East conflict

According to the minutes of the FOMC meeting of 28 and 29 July 2026, total PCE inflation stood at 4.1% year-on-year in May. Core inflation, excluding energy and food, stood at 3.4%. Both figures were higher than a year earlier.

The Fed attributes the persistently high inflation to a combination of factors: the effects of earlier tariff increases, higher energy and commodity prices as a result of the Middle East conflict, and the sharply increased demand driven by investment in AI infrastructure. Based on preliminary data, the staff estimated that total PCE inflation fell to 3.7% in June, largely due to lower energy prices. Core inflation eased slightly to 3.3%.

Meeting participants noted that price increases were broad-based across a wide range of goods and services categories. Some members indicated that underlying inflation also appeared elevated when excluding the categories directly affected by tariffs and energy prices. According to the minutes, materials for data centres, such as chips and steel, as well as smartphones, computer equipment and electricity, showed significant price increases.

Rate hike not ruled out, AI sector raises concerns

Most policymakers chose to leave interest rates unchanged in July, but several members wanted to raise rates by a quarter of a percentage point at the time. Moreover, a large share of participants indicated that further tightening may be justified if inflation does not decline quickly enough. Some doubted whether current financial conditions are restrictive enough to bring inflation back to the 2% target.

At the time of the meeting, market prices already pointed to a probability of roughly one in three for a hike in July. For the September meeting, a 25 basis point rate hike was fully priced in, followed by another step before the end of the first quarter of next year.

The minutes also contain a notable warning about financial stability. The Fed signals that high valuations and rising debt around AI infrastructure pose a risk. If investors adjust their long-term expectations about the profitability of the AI sector, this could lead to a broader price correction in financial markets. Stocks related to AI infrastructure outperformed the broad S&P 500 this year, but that rally stalled in the run-up to the meeting. The S&P 500 was slightly in the red over that period.

The labour market remained stable. The unemployment rate stood at 4.2% in June, virtually unchanged over the past two years. Average annual wage growth stood at 3.5%, slightly lower than a year earlier.