So, let’s get straight to the point, because what we read in the FED minutes changes the picture quite a bit.
For months now, everyone has been discussing the same thing. When will the FED cut interest rates? How many cuts will we see this year, etc.?
And then, suddenly, the minutes from the July 28-29 meeting come out and show something completely different. Inside the FED, many officials aren’t discussing a cut, but an INCREASE.
Yes, you read that correctly. And three of them didn’t just discuss it. They actually voted in favor of it.
The FOMC voted 9-3 to keep interest rates unchanged at 3.50%-3.75%. That makes it the fifth consecutive meeting where nothing has changed, following the three cuts we saw at the end of 2025.
And this is where things get interesting. The three dissenters wanted a 25-basis-point increase. Beth Hammack from Cleveland, Lorie Logan from Dallas, and Neel Kashkari from Minneapolis. All three are presidents of regional FED banks.
It’s the first time since 2016 that we’ve had three dissenting votes all going in the same direction.
Their argument was simple. They said that raising rates now would prevent “the need for a more abrupt and potentially more costly series of moves at a later stage.” In other words: better a small slap today than a punch tomorrow.
And it wasn’t just them. Two other presidents who didn’t have voting rights in July, Jeff Schmid from Kansas City and Alberto Musalem from St. Louis, later said they would also support a rate hike.
And why does all of this matter? FED interest rates are the benchmark for a huge number of loans. Mortgages, credit cards, auto loans, and so on. So they affect a lot of things.
The key phrase in the minutes is this: “Many participants judged that a tightening of policy would likely be necessary if inflation does not decline.”
And pay attention to something. In the language of FED minutes, every word matters. “Many” describes a group that is almost half of the 19 officials. We’re not talking about two or three people.
Some even said that financial conditions “may not currently be sufficiently restrictive” to bring inflation back to 2%.
“And how far away are we, Christo?” you might be wondering. PCE, the main inflation gauge watched by the FED, fell 0.1% in June on a monthly basis. That sounds good. But the annual rate remains at 3.7%. That’s almost double the target.
And there’s a big “but.” Some officials noted that even if you strip out tariffs and energy prices, underlying inflation is still above target. The pressures are broad-based.
Most officials, however, expect inflation to decline by the end of the year as the effects of tariffs and energy prices fade. But many see the possibility that it could remain stubbornly high.
The minutes say it clearly: the outlook is “highly uncertain” and the risks are tilted to the upside. And the escalation of the war in Iran made the picture even murkier.
Their biggest fear? That inflation remaining above target for years will begin affecting people’s expectations. Then wages. Then prices. And once that happens, it becomes much harder to bring inflation back down.
At the meeting, the FED described the labor market as “stable.” Supply and demand were in balance, they said. Some officials pointed to signs of weakness, such as the low rate of finding a job and elevated long-term unemployment. But overall, the picture was one of stability.
And then the data came in.
In July, the U.S. economy lost 23,000 jobs. Unemployment fell to 4.1%, but not because more people found work. It fell because the labor force shrank. And job gains from the previous two months were revised downward.
In the same vein, retail sales in July recorded their biggest decline in more than a year. Consumers pulled back on online purchases and cars.
And this is exactly where AI comes into play. Because the discussion about artificial intelligence made its way firmly into the FED minutes.
Several officials noted that industries connected to the AI buildout are seeing enormous demand for specialized workers. Electricians, machinists, engineers. And their wages are rising significantly.
Some said that AI’s impact on prices is currently limited to specific categories. Others, however, see it already pushing up overall demand and therefore inflation.
And as if that weren’t enough, financial stability also came into the discussion. Some officials pointed out that the enormous valuations of AI-related companies are based on very optimistic estimates of future earnings. And if those estimates are suddenly revised downward? Then we’re talking about a broad repricing of assets. And pressure on banks and institutions exposed to the sector.
The borrowing that is financing this entire AI buildout was also discussed. And who is providing that financing? Non-bank investors and regional banks.
And now we get to the more human side of the story.
The new FED chairman, Kevin Warsh, faced heavy criticism for his appearance at the press conference following the meeting. He failed to clearly explain why the committee kept rates unchanged. He avoided suggesting that a rate hike might be necessary in the coming months. And on top of that, he hinted that the 2% inflation target could change in January.
So what does that mean? Investors interpreted it as a signal that the FED may not be as committed to its target as previously thought.
What does the market expect now? At the end of July, the probability of a September rate hike was above 70%. Now it has fallen to around 33%. The scenario has shifted toward December.
Oh, and one more thing. Warsh floated the idea of reducing FOMC meetings from eight to six per year. Roughly one every two months. The reason? To gather more data between meetings and allow more time for strategic thinking. No decision has been made, and nothing changes for the rest of 2026. But if it happens, it would be a significant change in the way the central bank operates.
The minutes also included a discussion about a disruption in the settlement of transactions that occurred between meetings. The FED said that its policy of maintaining “ample” bank reserves helped money markets continue to function smoothly. There was also extensive discussion about the FED’s balance sheet and the bonds it holds, with members saying that the task force Warsh created on the issue could prove useful.
And all of this comes just before Jackson Hole, where Warsh will give his first speech since taking over as chairman in May.
