The Federal Reserve indicated that inflation risks remain "considerable" due to the uncertain impact of new trade tariffs, casting fresh doubt over imminent interest rate cuts, according to the July Federal Open Market Committee minutes released Wednesday.
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Despite signs of a labor market slowdown, a majority of Fed officials voted to keep the federal funds rate unchanged at 4.25%-4.50%, citing concerns that "tariff effects were becoming more apparent in the data," particularly in goods inflation, while services inflation continued to ease.
Two Dissenters Pushed For A Cut
For the first time since 1993, the Fed saw two dissenters — Governors Michelle Bowman and Christopher Waller — voting in favor of a 25 basis-point cut.
"These members judged that, excluding tariff effects, inflation was running close to the Committee's 2 percent objective," the minutes said.
They also believed that "higher tariffs were unlikely to have persistent effects on inflation," and voiced concern about "a weakening of labor market conditions," citing slower private payroll gains and hiring concentrated in a limited number of sectors.
Still, the prevailing view in the room leaned more hawkish.
Tariff Pressures Front and Center
Fed officials acknowledged growing evidence that tariffs are fueling inflation.
The minutes highlighted that "foreign exporters were paying at most a modest part of the increased tariffs," implying that domestic businesses and consumers are shouldering the bulk of the costs.
Many members now expect that businesses "would increasingly have to pass through tariff costs to end-customers over time."
While some noted the full impact may take time to filter into consumer prices, others stressed it wouldn't be appropriate to "wait for complete clarity" before adjusting policy.
In terms of inflation expectations, participants also raised the risk of them becoming "unanchored" if price pressures further increase, adding another layer of uncertainty to the policy outlook.
Labor Market Still Solid — But Cracks Are Emerging
The Fed observed that the unemployment rate remains low, "at or near estimates of maximum employment," supported by stable hiring and layoff trends. However, several participants noted that businesses remain cautious about adding or cutting jobs amid ongoing economic uncertainty.
Downside employment risks also included the growing adoption of artificial intelligence, which may lower employment, and tighter financial conditions that could impact housing and broader economic activity.
While the Fed acknowledged uncertainty in fiscal and tariff policy had moderately declined, the overall economic outlook remains foggy, requiring the central bank to balance its dual mandate carefully.
Notably, most members continue to view upside inflation risk as more pressing than employment risk.
Markets Shrug Off Minutes, Wall Street Slips
U.S. equity markets failed to find relief after the release.
As of 2:30 p.m. ET, the S&P 500 was down 0.6% at 6,375 point, and the Nasdaq 100 dropped 1%, dragged by continued weakness in AI-linked stocks.
Palantir Technology Inc. (NYSE:PLTR) fell nearly 3%, compounding a 9.4% loss from Tuesday.
The Dow Jones Industrial Average ticked down 0.1%, while the Russell 2000 lost 0.8%.
In the bond market, the 30-year Treasury yield edged up 2 basis points to 4.90%, and the U.S. dollar index remained stable near 98.1 levels.
Commodities held firm, with spot gold gaining 0.9% to $3,345 per ounce, while silver rebounded 1.2% after Tuesday’s drop.
Market expectations for a September rate cut softened. Futures now price in an 82% chance of a 25 basis-point cut, down from 85% before the minutes were published, showing that while a cut is still likely, confidence has been dented.
Markets now await remarks from Fed Chair Jerome Powell on Thursday at the central bank's annual symposium in Jackson Hole, Wyoming, where investors hope for clearer guidance on the path of interest rates.
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