The Federal Reserve has warned that strong demand linked to artificial intelligence could keep inflation high, while market prices for a rise in US interest rates this year have soared above 59%.
According to the minutes of the June meeting of the Federal Open Market Committee of the Federal Reserve, policymakers discussed several monetary policy avenues based on developments in inflation and the labor market.
One of the scenarios considered involved inflation remaining above the central bank’s 2% target despite a stable labor market, driven by strong demand linked to AI, the conflict in the Middle East or the effects of customs tariffs.
Under these conditions, the minutes showed that almost all participants believed that further tightening of monetary policy would likely be necessary to bring inflation back to the Fed’s target. At the same time, the paper presents an alternative scenario in which inflationary pressures ease, allowing inflation to return towards 2%.
High inflation continues to tighten
In the event that inflation begins to cool, almost all participants said it would likely be appropriate to maintain the current federal funds rate or possibly lower it, according to meeting minutes.
The June meeting ultimately ended with the Federal Reserve holding interest rates, the first policy meeting chaired by Kevin Warsh since he took over as Fed chairman.
The minutes also revealed differences among policymakers over when interest rates should end the year. Many participants anticipated that the appropriate federal funds rate would be within or slightly below the current target range by the end of the year. Others, however, believe rates are likely to end the year above the current range, underscoring continued uncertainty over the inflation outlook.
Furthermore, a few participants argued that there was already a case for raising rates, as upside risks to inflation remained high while downside risks to the labor market had eased somewhat. Despite everything, these officials maintained their support for keeping the key rate unchanged at the June meeting.
Markets continue to anticipate another rate hike
As policymakers debated multiple scenarios, forecast markets are increasingly leaning toward another rate hike before the end of the year. According to Polymarket data, traders currently assign a 59% chance that the Federal Reserve will raise interest rates in 2026.
Those odds increased this week following renewed tensions between the United States and Iran after President Donald Trump threatened new military strikes against Iran, adding another potential source of inflation risk alongside energy market uncertainty.
At the same time, expectations for the next Fed meeting remain more balanced. According to the CME FedWatch tool, there is a 69.5% probability that policymakers will keep interest rates unchanged at the July FOMC meeting. While this remains the most likely outcome, the probability has decreased by approximately 80% over the past week.
Current CME FedWatch prices also show a 30.5% probability of a rate increase in July, indicating that investors have become less confident that the Fed will be able to keep borrowing costs unchanged if inflation risks continue to build.
Overall, minutes from the June meeting indicate that Federal Reserve officials continue to view new inflation data as the deciding factor for future policy. Although many members believe it is still possible to hold or even cut rates if price pressures ease, persistent inflation driven by AI demand, geopolitical developments or tariffs could still push the central bank to raise rates again later this year.
