Newly released Federal Reserve minutes from the July 28-29 meeting contain a sentence warning that continued elevated inflation could start shaping how businesses set wages and prices. The finding complicates Fed Chair Kevin Warsh's path just as the Dow, S&P 500, and Nasdaq sit near record highs, raising the odds the FOMC opts to raise rates.
Federal Reserve Chair Kevin Warsh's FOMC just spelled out its worst inflation scenario inside its own meeting minutes. The July 28-29 notes state that continued elevated inflation could begin to affect how businesses set wages and prices, a shift that would push the Fed toward raising rates just as stocks sit near record highs.
Stocks have rallied while inflation lingers
Since early June, the Dow Jones Industrial Average has gained 0.98%. The S&P 500 has added 0.43% over the same stretch, with the Nasdaq Composite matching that gain. Yet headline inflation has now topped the Fed's 2% target for 65 consecutive months, a run that spans the pandemic, tariffs, and the Iran war.
The minutes' most worrying line
Under the section on participants' views on current conditions, the minutes note that inflation risks are skewed to the upside because of renewed conflict and uncertainty in the Middle East. Many participants added that after several years of inflation above 2%, continued elevated price growth could begin to affect inflation expectations and wage- and price-setting decisions — in other words, businesses treating high inflation as the new normal. Three regional Fed presidents dissented in favor of a quarter-point rate hike at that same meeting, arguing early action would head off a bigger tightening cycle later.
Bessent's bond program complicates the picture
Treasury bond yields at the long end of the curve have climbed this year, a move that can raise corporate borrowing costs and cool inflation on its own. But Treasury Secretary Scott Bessent's announcement of a bigger bond-buying program last week threatens to undo that pressure. If the FOMC concludes businesses are starting to price in permanently elevated inflation, Warsh and his colleagues may have little choice left but to deliver a rate hike, a move that could squeeze the valuations behind Wall Street's AI-driven rally.
Source: The Motley Fool
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