Waller proposed to reduce FOMC meetings: from eight times a year to six.

Written by: Li Dan, Wall Street Journal

The Federal Reserve's monetary policy meeting minutes released at the end of July signal a more hawkish stance.

On Wednesday, the 19th, Eastern Time, the Federal Reserve published the minutes of the FOMC meeting held from July 28 to 29. The minutes indicate that while a majority of officials ultimately supported keeping interest rates unchanged, several attendees believed that if inflation does not decline, a tightening of monetary policy may be necessary in the future. Meanwhile, some officials think the current financial conditions may not be restrictive enough to drive inflation back to the 2% target.

The statement after the July meeting revealed an unusually large disagreement among the Fed's decision-makers: three FOMC voting members — Cleveland Fed President Mester, Minneapolis Fed President Kashkari, and Dallas Fed President Logan voted against the interest rate decision, all advocating for a rate hike of 25 basis points. The minutes further showed that support for a rate hike at that time may not have been limited to these three officials, as several attendees leaned towards a 25 basis point hike during the meeting.

Another distinct feature of these minutes is that the AI boom has entered discussions about inflation in a rather specific manner for the first time.

The minutes show that, on one hand, several officials believe that the current impact of AI development on consumer prices remains limited to a few categories; on the other hand, several other officials have observed that AI investments are exerting a broader influence on prices by driving up overall demand and believe this impact may soon expand.

The minutes noted that at the July meeting, the Fed staff's expectations for U.S. economic activity were "slightly weaker" compared to the previous meeting in June, primarily reflecting changes in the latest data. Overall, these staff members believe that their expectations for "employment and real GDP growth face downside risks, while inflation expectations have upside risks, meaning inflation may persist longer than anticipated."

Reporter Nick Timiraos, known as the "New Fed Correspondent," believes that the FOMC minutes reveal broader support for a rate hike, with many officials indicating that if inflation does not decline, a rate increase may be necessary. He pointed out that at the July meeting, the number of officials supporting a rate hike exceeded the three who ultimately voted against it. Additionally, other officials signaled that they would also support a rate hike if inflation did not improve.

Some decision-makers believe current financial conditions are not restrictive enough to drive inflation to 2%

The expression regarding the outlook for monetary policy from the July meeting is one of the most noteworthy hawkish signals in these minutes.

The minutes state: "Several attendees assessed that if inflation does not decline, a tightening of policy may be necessary. Some attendees commented that the current financial conditions may not be restrictive enough to drive inflation down to 2%."

This statement implies that the "hold steady" at the July meeting does not mean the FOMC has excluded the option of a rate hike. On the contrary, whether inflation can continue to decline amid inflation remaining above the 2% target has become a key variable determining future policy direction.

The minutes show that officials generally believe economic activity continues to expand at a solid pace, and the labor market remains stable overall, but inflation is still higher than the 2% target. Therefore, a majority of officials support temporarily maintaining the current interest rate level to wait for more data to clarify the inflation outlook further.

The camp advocating a rate hike in July likely includes more than three, with a few believing a hike now could prevent more aggressive hikes later

From the voting results disclosed after the meeting, three FOMC voting members explicitly opposed keeping interest rates unchanged at the July meeting.

These minutes note that most attendees supported the policy rate remaining unchanged, with participants generally observing that the U.S. economic activity continues to grow robustly, and the labor market appears stable, while inflation in the U.S. remains elevated compared to the FOMC's target of 2%, which partly reflects price increases in certain sectors due to supply shocks, such as energy.

Following this, the minutes point out that "several attendees advocated raising the target range for the interest rate by 25 basis points at this meeting. These attendees believe that price pressures seem to be widespread and that the (FOMC) committee should adopt a more restrictive policy stance to fulfill its commitment to achieving price stability and full employment (dual) goals."

The minutes do not disclose the specific number of supporters for the rate hike, so "several" cannot simply be equated with "three dissenting officials," but it can be confirmed that the discussions supporting a rate hike at the meeting were broader than indicated by the final voting results showing three.

Among these officials who supported the rate hike, a few believe that if a 25 basis point hike is implemented now, it could prevent the need for a series of more drastic and costly tightening measures in the future. The minutes state:

"A few attendees supporting a rate hike at this meeting believe this could help avoid the need for a series of larger and potentially more costly tightening measures in the future."

This reveals the hawkish officials' policy logic: rather than waiting for inflation to become more stubborn and then being forced to tighten monetary policy significantly, it is better to take preemptive small actions.

Most attendees expect inflation to decline this year, but many are concerned about persistently high inflation

Regarding inflation, there is not unanimous pessimism within the Fed.

The minutes state that most attendees expect inflation to decrease in the remaining months of the year, primarily due to the diminishing impact of tariffs and previous energy price increases. However, at the same time, many attendees point out that inflation may persist at a high level.

This wording is noteworthy.

On one hand, officials still believe inflation will eventually decrease; on the other hand, an increasing number of officials are beginning to worry that this process will take longer than previously expected.

The minutes indicate that some officials believe that the transmission of past tariff increases to price levels is basically complete, suggesting that the recently announced new tariffs may have a relatively limited impact on measuring inflation.

However, on a deeper level, officials are concerned that several years of high inflation may begin to affect inflation expectations and the wage and price-setting behavior of businesses and workers. The minutes state that many attendees emphasize that after experiencing several years of inflation above 2%, if inflation remains elevated, it could start influencing inflation expectations as well as the decisions relating to wage and price setting.

Furthermore, some attendees point out that repeated supply shocks in recent years have postponed the expected time for inflation to return to 2%, further intensifying concerns about persistently high inflation.

AI is becoming a new variable for inflation: it may both raise prices and ultimately lower inflation

In comparison to past FOMC meetings, a very prominent new change in the July minutes is that the AI investment boom has been directly incorporated into discussions about inflation trends. The minutes state:

"Several attendees assess that the impact of AI development on consumer prices has so far remained limited to a few specific categories.

Meanwhile, several other attendees believe that AI investments have exerted a broader influence on prices by driving up overall demand, or assess that this impact may emerge soon.

A few attendees commented that it is still too early to judge whether the developments related to AI will primarily lead to changes in relative prices between different goods and services or have a more widespread and lasting impact on inflation.

Some attendees pointed out that productivity gains brought by adopting AI will ultimately lower production costs and increase overall supply, which should exert downward pressure on inflation. However, there are differing views on how long it will take for this impact to become apparent.

The above comments actually reveal the Federal Reserve's two opposing judgments regarding the relationship between AI and inflation.

In the short term, AI investments may push up inflation. Some officials have observed that AI investments are generating broader price impacts through increased overall demand. Previous meeting materials also mentioned substantial increases in the prices of materials required for data centers, such as chips and steel, as well as price pressures on consumer-facing items like smartphones, computer equipment, software, and electricity.

In the long term, AI may instead lower inflation. Some officials believe that the productivity gains from the spread of AI will ultimately lower production costs and expand overall supply, thus exerting downward pressure on inflation.

The real uncertainty lies in how long it will take for the supply-side productivity benefits brought by AI to become apparent.

Therefore, AI is becoming a complex variable for the Federal Reserve: during the investment and construction phase, it may push up inflation through strong capital expenditure and demand expansion; but once productivity improvements truly unlock, it may expand potential output, lower production costs, and ultimately serve as an "extinguisher" for inflation.

AI investments not only impact inflation but may also become financial stability risks

The discussion about AI in the minutes is not limited to inflation.

Federal Reserve officials also discussed the financing risks brought about by the rapid construction of AI infrastructure. Some attendees expressed concerns about the funding vulnerabilities behind the rapid expansion of AI-related infrastructure, noting that the high valuations of AI-related companies are based on the market's optimistic assessment of their long-term profitability prospects.

If the market significantly lowers these profitability expectations, it could trigger a broad reassessment of asset prices, tighten financial conditions, and put pressure on financial institutions directly or indirectly exposed to the AI industry.

Additionally, a few attendees specifically pointed out that capital expenditures in the AI industry are increasingly being financed through borrowing, including credit from non-bank investors and regional banks.

This suggests that from the Federal Reserve's perspective, the AI boom is no longer just a "productivity story," but also a convergence point for multiple policy variables related to inflation, overall demand, asset valuation, and financial stability.

Tariff impacts are expected to gradually diminish, but conflicts in the Middle East may cause inflation to persist longer

The minutes show that Federal Reserve officials expect the inflationary pressures from tariffs and previous energy price increases to gradually weaken. However, at the same time, many attendees still worry that inflation may remain high for a longer period.

The minutes state: "Most attendees expect inflation to decline in the remaining months of the year as the effects of tariffs and previous energy price increases fade, but many attendees point out that inflation may persist at a high level."

This judgment shows that there is still a degree of optimistic expectation among Federal Reserve officials regarding the short-term trajectory of inflation: as the impacts of past tariff shocks and energy price increases gradually fade from year-on-year data, inflation is expected to decrease in the remaining months of the year.

Regarding the tariffs themselves, the minutes state: "Several attendees assess that the transmission of past tariff increases to price levels has now been basically completed, and the impact of the recently announced tariffs on measuring inflation may be relatively mild."

However, the effects of tariffs on business costs and consumer prices still carry uncertainties.

The minutes note that a couple of attendees indicated that some businesses they have interacted with are currently mainly absorbing higher input costs by compressing profit margins and have not yet passed on the full cost rises to consumers; however, if the conflicts in the Middle East continue, or if new supply shocks occur, these businesses may increasingly find it difficult to avoid raising consumer prices.

In other words, some businesses are currently using profit margins to maintain price stability. As long as businesses can still bear cost increases, tariffs and other supply shocks may not fully reflect in consumer prices; but if conflicts in the Middle East continue to drive up costs related to energy and transportation, or new supply chain shocks emerge, profit margins may be further compressed, leading to consumers eventually having to absorb these costs.

At the same time, the minutes also document opposing judgments. Another couple of attendees pointed out that some businesses they have interacted with believe that consumers may resist further price increases.

Overall, the views conveyed by the minutes from Federal Reserve officials are that the price transmission of past tariffs has largely been completed, and the direct impacts of recently added tariffs are expected to be limited; however, if conflicts in the Middle East persist or if new supply shocks occur, the space for businesses to absorb cost increases may further shrink, and inflation pressures may resume.

This resonates with the judgment in the minutes that "inflation risks are tilted to the upside." For the Federal Reserve, in the future, it will be crucial to monitor not only the tariffs themselves but also how long business profit margins can endure, whether consumers will accept further price increases, and whether conflicts in the Middle East will evolve into a new persistent supply shock.

Waller proposed to reduce FOMC meetings: from eight times a year to six times

This meeting's minutes also revealed a detail directly related to interest rate policy, but previously received less market attention: Waller proposed to reduce the annual number of regular policy meetings of the FOMC.

Timiraos noted in his report that Waller proposed at the July meeting to reduce the FOMC's annual regular policy meetings from the current eight times to six times. This change will not be implemented immediately, and the minutes indicate that even if it ultimately receives approval, it will not take effect before 2027.

Currently, the FOMC holds eight regular meetings each year, typically about six weeks apart. The Federal Reserve's official meeting calendar shows that the FOMC is currently operating under a schedule of eight regular meetings per year, with additional meetings held as necessary.

Waller's proposal to reduce the number of meetings aligns with his consistent emphasis on reducing excessive reliance on short-term market signals in policy philosophy.

If the number of meetings is reduced, the data accumulation period between each meeting will be longer, allowing the Federal Reserve more time to observe changes in inflation, employment, and financial conditions without letting the market excessively trade around whether to hike or not at the "next meeting."

This also connects to Waller's previous emphasis on allowing financial markets to provide "unfiltered information." After the July meeting, Waller emphasized that rising market interest rates have already tightened financial conditions, somewhat fulfilling the role of a rate hike. Timiraos's earlier reports also indicated Waller's belief that the market has reflected economic changes through higher nominal and real U.S. Treasury yields.