Fed minutes show split on rate hikes as AI spending stokes inflation

The Fed's June minutes revealed a divided committee wrestling with whether AI-driven capital spending is keeping inflation sticky above target.

The Federal Reserve's June meeting minutes released Wednesday revealed a divided committee that unanimously held rates at 3.50% to 3.75% while flagging artificial intelligence-related capital spending as an emerging inflation risk.

"With nine Fed officials projecting the need for tighter policy this year, a rate hike is on the table when policymakers gather for the July meeting," said Tim Duy, chief U.S. economist at SGH Macro Advisors. "The Fed is missing on only one side of its mandate. This should not be a debate anymore."

The minutes showed officials split between those favoring patience and those pushing for additional tightening, with several noting that the recent ceasefire-driven decline in oil prices to around $70 a barrel may provide only temporary relief to headline inflation. The Fed's preferred inflation measure remains more than a percentage point above the 2% target at year-end, according to projections issued after the June 16-17 meeting. Two-year Treasury yields rose after the release while the S&P 500 pared gains, and Bitcoin reversed course as traders reassessed the probability of a September hike at about 56%, down from more than 60% before last week's weaker-than-expected jobs report.

The divided stance leaves markets pricing an uncertain path between the July 28-29 meeting and September. With CPI data due July 14 serving as the final major data point before the July decision, the minutes effectively set up a data-dependent showdown: if inflation prints hot, the hawkish faction gains the upper hand; if it cools, the doves may buy more time. The novel linkage of AI investment to inflation adds a structural dimension that could keep the Fed on alert even as commodity-driven price pressures ease.

The June 16-17 meeting was the first chaired by Kevin Warsh, who removed references to the type of rate adjustments the Fed might make, arguing that such language can make a central bank less nimble. Fed Governor Christopher Waller offered a contrasting view Monday, calling forward guidance a "valuable tool" that speeds the impact of monetary policy under the right circumstances.

The labor market presents a mixed picture. Nonfarm payrolls missed expectations in June, but the unemployment rate fell to 4.2% from 4.3% in May, suggesting the economy is still generating enough demand to keep the Fed focused on inflation rather than employment. Waller captured the shift in a speech in Rome: "A year ago I was advocating for rate cuts because the labor market was not looking good. Those risks have completely flipped around now."

AI Spending Emerges as a New Inflation Variable

The minutes' explicit mention of artificial intelligence spending as an inflation risk marks a departure from prior Fed communications, which had focused primarily on services inflation and wage pressures. The surge in data center construction and semiconductor fabrication — driven by demand for AI training and inference infrastructure — is adding to capital goods orders and construction spending at a pace that several Fed officials viewed as potentially overheating.

This creates a transmission channel that differs from traditional demand-pull inflation: rather than consumers driving prices higher, it is corporate capital expenditure — much of it concentrated among a handful of technology giants — that is absorbing resources and pushing up costs in construction, energy, and specialized equipment. The dynamic could persist even if consumer spending slows, giving the Fed reason to keep rates elevated.

If the July 14 CPI report shows core inflation accelerating, the probability of a July hike could rise from the current one-in-four odds. If inflation moderates, the debate shifts to September, where OIS markets currently price a 56% chance of a 25-basis-point increase. The minutes make clear that neither outcome is assured — and that AI spending has become a wild card the Fed did not anticipate a year ago.

This article is for informational purposes only and does not constitute investment advice.