The June Federal Open Market Committee (FOMC) decision to keep the target range for the federal funds rate The June FOMC minutes, released yesterday, detail how seriously the Federal Open Market Committee (FOMC) is taking the inflation side of its dual mandate. Even though the minutes are usually old news, here are three reasons why investors should pay attention.

First: Inflation Risks Are Rising

Inflation concerns appeared to intensify. Several FOMC participants emphasized that:

“…price pressures had become more broad based, with a large share of goods and services—including transportation, airfares, petrochemical products, and agricultural inputs—experiencing substantial increases.”

with many of them noting, even before the most recent flareup in the Middle East conflict, that:

“…elevated commodity prices and supply disruptions could persist longer than currently anticipated.”

And the AI capex boom is creating its own inflationary pressures:

“…ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity.”

One risk to pay special attention to is the self-reinforcing feedback loop between continued elevated inflation, inflation expectations and wage demands.

Second: A Fractured Committee

The June FOMC statement papered over a real split, as a few participants appeared to push for higher rates at that meeting:

“A few participants commented that, in light of these developments, there was a case for raising the target range for the federal funds rate, but those participants indicated that they supported maintaining the current target range at this meeting.”

The reference to “at this meeting” suggests that the differing positions may widen in July if the conflict in the Middle East intensifies again, especially considering that:

“Several participants remarked that they did not see the current policy stance as restrictive.”

Third: The Scenarios Tell the Story

The minutes offer a rare glimpse at the Fed’s so-called reaction function, how it translates incoming data into rate decisions, by walking through two scenarios the committee will weigh for the path ahead.

In one path, price pressures simply fade:

“…inflationary pressures would dissipate and inflation would soon begin to return to 2 percent. In such scenarios, almost all of these participants noted that it would likely be appropriate to maintain or eventually lower the target range for the federal funds rate.”

In the other, inflation stays sticky:

“…in the context of stable labor market conditions, inflation would remain elevated due to strong AI-related demand, the conflict in the Middle East, or the effects of tariffs. In such scenarios, almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2 percent.”

Currently investors assign nearly 30% odds to a hike in July. With the U.S. launching fresh strikes on Iran, the data arriving in coming weeks will affect the probability of these two scenarios and determine which path the Fed will follow. Chair Warsh may find it difficult to avoid questions about his assessment of the inflation outlook next week during his testimony to Congress. Market participants shouldn’t be surprised if a rate hike is in their future.

---

To receive more newsletters from Fabio directly to your inbox, subscribe on substack.