The US Federal Reserve could face growing pressure to raise interest rates in the coming months if inflation fails to moderate, with several policymakers warning that monetary policy may not yet be restrictive enough to bring inflation back to the 2 per cent target, according to the minutes of the Federal Open Market Committee’s July 28-29 meeting.

The minutes indicated that most participants expected inflation to decline over the rest of 2026 as the effects of tariffs and earlier energy price increases fade. However, policymakers remained concerned that inflation could prove more persistent, particularly amid renewed geopolitical tensions, higher energy costs and strong demand associated with the artificial intelligence buildout.

At its July 28-29 meeting, the FOMC decided to keep the federal funds target range unchanged at 3.5-3.75 per cent, in a 9-3 vote. Three members, Beth Hammack, Neel Kashkari and Lorie Logan, dissented and favoured a 25-basis-point increase. The decision marked the fifth consecutive meeting at which the Fed kept rates unchanged.

The minutes, however, revealed a broader debate over the need for tighter policy. Several participants supported a 25-basis-point hike, arguing that price pressures were broad based and that a more restrictive stance could help prevent the need for sharper tightening later. Many participants also said policy tightening would likely be necessary if inflation did not decline.

The staff estimated June headline PCE inflation at 3.7 per cent and core PCE inflation at 3.3 per cent. Inflation remained elevated relative to the Fed’s 2 per cent goal, with policymakers pointing to tariffs, higher energy and input costs linked to the West Asia conflict and rising demand from AI investment.

Looking ahead, Fed staff projected inflation would step down next year and reach around 2 per cent in 2028. However, risks to the inflation outlook were judged to be skewed to the upside, while risks to employment and GDP growth were seen as tilted to the downside.

The minutes also highlighted the growing role of AI in the US economy. Participants said AI-related investment was supporting business spending and could lift productivity and potential output in coming years. At the same time, they warned that a sharp correction in highly valued AI-linked assets could tighten financial conditions and weigh on consumer spending.

The labour market was assessed as broadly stable, with unemployment at 4.2 per cent in June. Economic activity continued to expand at a solid pace, supported by resilient consumer spending and strong business investment.

The Fed reaffirmed its commitment to “deliver price stability”, leaving the September 15-16 meeting as a key point for reassessing the inflation outlook and the need for further policy tightening.

Published on August 20, 2026