U.S. monetary policymakers noted high uncertainty with regard to the outlook on interest rates and discussed a range of scenarios from inflationary pressures dissipating to remaining elevated, the minutes of the Federal Reserve’s June meeting showed on Wednesday.

Participants at the June 16-17 meeting noted that inflation remained high and reflected in part price increases from energy supply shocks emanating from the Middle East conflict. A few participants made a case for raising interest rates right away.

The broader debate about rates seemed to be equally divided, with “most” participants pointing to scenarios where inflation would start coming back towards the Fed’s 2% target on its own.

“Most participants, however, also pointed to scenarios in which, 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,” the minutes said.

Rapidly shifting inflation dynamics

This is the first minutes published under the leadership of new chair Kevin Warsh. The Fed last month held the federal funds rate steady at 3.50%-3.75%, as widely expected. More notably, the central bank’s updated dot plot showed a decidedly hawkish tilt, with half of the policymakers that contribute to the projections anticipating rate hikes this year.

Wall Street was also keen to hear what Warsh would have to say, and the new chief did not disappoint. He unveiled a significantly shorter Federal Open Market Committee (FOMC) statement, committed to mostly focus on combating inflation, decided to drop forward guidance, and announced a sweeping review of several Fed operations.

But, on the same day as the Fed’s rate decision, the U.S. and Iran inked an interim peace deal under which fighting was stopped on all fronts and the critical Strait of Hormuz was reopened. Peace talks in Switzerland immediately after the signing of the agreement resulted in the U.S. dropping sanctions on the sale of Iranian oil and the start of further technical negotiations between the two sides. Oil prices rapidly declined to pre-war levels soon after, easing inflationary concerns.

In an appearance at an international central bank forum in Portugal at the start of this month, Warsh reiterated his stance to drop forward guidance, though he did note that inflation risks had come down.

However, inflation expectations have been upended this week after the biggest escalation in tensions between the U.S. and Iran since the signing of the memorandum of understanding. Washington and Tehran exchanged strikes on Tuesday over new Iranian attacks on three commercial ships in and around the Strait of Hormuz.

President Donald Trump on Wednesday said that the ceasefire between the two sides was now “over” and that he didn’t want to “deal with them anymore,” though he also said he didn’t think the war would restart.

Oil prices spiked against this backdrop, with Brent crude futures, the global benchmark, briefly topping $80 a barrel for the first time in over two weeks.

Policymakers appear to support shorter statement

The minutes also showed that “a number of participants” thought it was an “opportune time” to mull changes to the FOMC’s rate decision statements. The one from the June meeting had significant amendments to it from those under former Fed chair Jerome Powell. It was a much pared down version spanning just one page and ending with a simple assertion that the FOMC would “deliver price stability.”

Warsh has previously expressed discomfort with guidance on monetary policy, most notably during his time as a Fed governor from 2006 to 2011. Warsh in June had said the new statement’s format would “just” give “the facts” and would no longer include forward guidance.

“A majority of participants remarked that they saw advantages in shortening the statement. Most participants emphasized that they preferred not to repeat the language in the previous postmeeting statement that had suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions. Various participants discussed how the public could perceive the changes to the postmeeting statement,” Wednesday’s minutes said.
Source: Investing.com