Minutes from the Federal Open Market Committee’s (FOMC) July meeting indicate that most Federal Reserve officials view the risk to inflation as greater than the risk to the labour market. The meeting, held July 29-30, revealed a growing divide within the central bank’s rate-setting committee, particularly concerning the impact of tariffs. While officials acknowledged potential downsides for both inflation and employment, “a majority of participants judged the upside risk to inflation as the greater of these two risks”, according to the minutes.
During the meeting, policymakers maintained interest rates in a range of 4.25 per cent to 4.5 per cent, citing significant uncertainty amidst a moderation of economic activity in the first half of the year. The committee’s statement described the labour market as “solid” but noted that inflation remained “somewhat elevated”. Chairman Jerome Powell suggested in a press conference that the inflationary impact from tariffs could be temporary, but stressed the need to guard against more persistent effects.
Committee members actively debated whether tariffs would lead to a one-time price increase or a more sustained inflationary shock. The minutes highlighted that “several participants emphasised that inflation had exceeded 2 per cent for an extended period and that this experience increased the risk of longer-term inflation expectations becoming unanchored in the event of drawn-out effects of higher tariffs on inflation”. This underscores the Fed’s heightened vigilance regarding inflation and its potential long-term consequences for the economy.
