The hawkish sentiment is rising! The Fed's July minutes show that "several officials support a rate hike," and Waller also suggested reducing the number of meetings.

The minutes of the Federal Reserve's July meeting, released on Wednesday local time, indicate a deepening concern among Fed officials regarding inflation. Several officials supported raising interest rates during the meeting held on July 28-29, with many arguing that further tightening of monetary policy may be necessary if inflation does not revert to the 2% target. The minutes also revealed that Federal Reserve Chairman Kevin Walsh is advocating for discussions to reduce the frequency of annual policy meetings from eight to six. The July meeting resulted in a decision to maintain the federal funds rate target range at 3.50% to 3.75% with a vote of 9 in favor and 3 against, marking the fifth consecutive meeting where the Fed refrained from changing rates after three cuts at the end of 2025. Dallas Fed President Lori Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari cast dissenting votes, advocating for a 25 basis point increase. Additionally, two regional Fed presidents who did not have voting rights at the timeJeff Schmid of the Kansas City Fed and Alberto Musalem of the St. Louis Fedlater expressed support for a rate hike. The minutes showed that officials favoring a rate hike believe that price pressures appear to be widespread, suggesting that the committee should adopt a more restrictive policy stance to sustainably achieve price stability and maximum employment; otherwise, they might face a steeper and potentially costlier continued tightening later on. A broader group of "many" officials believes that if inflation does not decline, policy tightening may be necessary. According to the Fed's terminology, "many" here refers to approximately half of the nearly 19 decision-makers, including officials who did not participate in the interest rate vote. High Uncertainty The outlook for inflation was the central topic of discussion at the July meeting. Most participants expect that inflation will gradually decline over the year as the effects of tariff impacts and earlier rises in energy prices fade; however, many also pointed out that inflation could remain elevated for a longer period. The minutes noted that participants assessed the outlook for inflation as highly uncertain, with the renewed escalation of hostilities in Iran casting a shadow over the inflation outlook. This is especially true following the conflict that began between the Trump administration and Israel against Iran, which has constrained oil and gas transportation through the Strait of Hormuz nearly six months after hostilities began. During the meeting, officials described the labor market as stable, with supply and demand essentially balanced. The statement after the meeting was almost identical to Junes, reaffirming their commitment to achieving price stability and continuing to describe economic growth as robust, while also noting strong capital expenditure and productivity growth. However, data released after the July meeting generally indicated a slowdown in economic activity. July retail sales saw the largest drop in over a year, as consumers reduced spending at online stores and auto dealers; July core inflation also showed moderate performance; employers unexpectedly laid off workers, and employment growth in the previous two months was revised down, indicating a weaker labor market than previously expected. This data somewhat alleviated the pressure on the Fed to raise rates in the near term. Market expectations for the timing of interest rate hikes subsequently adjusted. Federal funds futures showed, as of Wednesday morning local time, about a 36% probability for a rate hike at the September meeting, significantly down from over 70% at the end of July; however, the market still considers there is more than a 50% chance for rate increases starting at the meetings on October 27-28, and if rates remain unchanged in October, there is a high probability of a rate hike at the last meeting of the year in December. No officials in the minutes expressed support for a rate cut, indicating that policy discussions have clearly shifted away from earlier expectations for rate reductions. Press Conference Criticism The minutes also disclosed that Walsh proposed the idea of reducing the Feds annual policy meetings from eight to six, believing that holding meetings approximately every two months would allow for more information to be accumulated compared to the current arrangement and give decision-makers and staff more time to consider strategic monetary policy issues. Walsh sought the committee's opinion on this, but the minutes made it clear that this year's (2026) meeting schedule would not be adjusted. If implemented, this would mark a significant change in the way the Fed operates. Additionally, participants viewed the upcoming review of the Fed's balance sheet management task force as an opportunity for comprehensive discussion, but many officials reiterated that the main tool for adjusting monetary policy should remain the adjustment of the federal funds rate target range, rather than actively managing the Fed's asset holdings. Previously, Walsh faced widespread criticism for his performance at the press conference following the July meeting. He failed to clearly explain the rationale behind the committee's decision to maintain rates, avoided mentioning the potential for rate hikes in the coming months, and hinted that the FOMC's inflation target could be adjusted in January. At that time, investors pushed long-term Treasury yields to nearly a twenty-year high, reflecting a decline in confidence in the Fed's commitment to the 2% inflation target, although the five-year breakeven inflation rate only widened slightly. On the day the minutes were released, the financial market reacted moderately. Earlier on Wednesday, the U.S. Treasury announced that it would double the size of long-term Treasury buybacks, alleviating upward pressure on yields and helping the stock market rebound after a sharp decline on Tuesday. Looking ahead, the market generally expects the Fed to remain on hold at its meeting on September 15-16, as recent data show slight easing in inflation and signs of cooling in the labor market. However, officials remain divided on whether further rate hikes are needed and are also more cautious about the strength of the labor market and risks to sustaining full employment. Walsh has been reluctant to discuss his path for monetary policy during his tenure and is expected to give his first speech since assuming the Fed chair in May at the Jackson Hole Global Central Bank Annual Conference, where he may provide more clues.