Federal Reserve July Minutes: Most believe inflation poses a greater risk than employment, concerned about the fragility of the U.S. Treasury market, and paying attention to the impact of stablecoins

The minutes released on Wednesday, August 20, Eastern Time, show that at the most recent Federal Reserve monetary policy meeting at the end of last month, Fed policymakers did not have a consensus on inflation, employment, or the impact of the Trump administration's tariff policies.

At the meeting held on July 30, the Federal Open Market Committee (FOMC) decided to hold steady again, but the post-meeting resolution indicated that two governors—Waller, rumored to be a leading candidate for the next Fed chair, and Bowman, the Fed's vice chair for supervision nominated by Trump—voted against the decision due to their advocacy for an immediate rate cut. This marks the first time in over thirty years that so many Fed governors have disagreed with a rate decision.

The minutes also show that nearly all policymakers supported not cutting rates, with only two dissenting. The minutes reflect that there were divisions among Fed officials regarding the risks to inflation and employment, as well as the impact of tariffs on inflation during the July meeting; however, the majority still believed that the risks of rising inflation outweighed the risks of declining employment. Many felt that the effects of tariffs would take some time to fully manifest.

Economically, some anticipated that U.S. economic activity would remain robust, while others expected low growth to continue in the second half of the year.

Additionally, Fed officials generally believed that it was necessary to monitor vulnerabilities in some financial markets, with some expressing concerns about the fragility of the U.S. Treasury market, while others pointed out worries regarding banks and foreign exchange swaps. Many discussed the impact of the recently introduced stablecoin legislation on such digital assets, with participants believing that its effects on the financial system and the implementation of monetary policy should be closely monitored.

Most believe inflation risk outweighs employment risk; two believe employment risk is more prominent

The minutes stated that when assessing risks and uncertainties related to the economic outlook, participants believed that uncertainty regarding the economic outlook remains very high, "although some participants pointed out that uncertainties related to fiscal policy, immigration policy, or tariff policy have decreased."

Participants generally noted that the FOMC's dual mandate of maximum employment and price stability both face risks, particularly emphasizing the risks of rising inflation and declining employment.

"A majority of participants believed that the risks of rising inflation are significant, while several participants believed that the two risks are roughly balanced, and a couple of participants believed that the risks of declining employment are more prominent."

Regarding the risks of rising inflation, participants pointed out the uncertain effects of tariffs and the possibility that inflation expectations could become unstable.

In addition to the risks posed by tariffs, the risks of declining employment mentioned by participants include the potential tightening of financial conditions due to rising risk premiums, further deterioration in the real estate market, and the widespread use of artificial intelligence (AI) in the workplace potentially lowering employment rates.

Many believe the effects of tariffs may take time to fully manifest; there are differences on the impact of increased tariffs on inflation

The minutes stated that in discussing inflation issues, many participants pointed out that the overall inflation rate in the U.S. remains slightly above the Fed's long-term inflation target of 2% Participants pointed out that the effects of tariffs are becoming increasingly evident in the data, with recent inflation in commodity prices rising while inflation in service prices continues to slow. A couple of participants believe that the tariff effects obscure the underlying trends in inflation, and without considering the tariff effects, inflation is close to the target.

Regarding the inflation outlook, participants generally expect inflation to rise in the short term. They believe that there remains considerable uncertainty regarding the timing, magnitude, and duration of the impact of the Trump administration's tariff increases this year.

On the timing of the tariff increases,

Many participants noted that the full impact of the tariff hikes may take some time to manifest in consumer goods and service prices.

As for the magnitude of the price impact from tariffs, a few participants pointed out that evidence so far suggests that foreign exporters have borne only a small portion of the new tariff costs, meaning that domestic U.S. businesses and consumers are primarily bearing the tariff costs.

Several participants expect, based on information from business contacts or surveys, that over time, many companies will increasingly have to pass the tariff costs onto end customers.

However, a few participants reported that business contacts and survey respondents indicated they have adopted various strategies, such as changing suppliers and utilizing automation and new technologies to avoid fully passing the tariff costs onto customers.

A few participants emphasized that the current demand conditions limit businesses' ability to pass tariff costs into prices.

Regarding the persistence of inflation,

"A few participants emphasized that they expect the tariff increases will only lead to a one-time rise in prices, which will be realized over a reasonable period. A few participants noted that tariff-related factors, including supply chain disruptions, could lead to persistently high inflation and that it may be difficult to distinguish tariff-related price increases from changes in underlying trend inflation."

Participants noted that long-term inflation expectations remain stable, and maintaining this stability is crucial.

Several participants emphasized that the inflation rate has been above 2% for an extended period, and if the tariff increases have a long-term impact on inflation, this situation will increase the risk of long-term inflation expectations losing stability.

Some believe it is inappropriate to wait for the full impact of tariffs to become clear before taking action; current interest rates may not be far above neutral levels.

When considering the monetary policy outlook, almost all participants believe that, given the labor market remains robust and current monetary policy is moderate or slightly tightening, the Federal Reserve is fully capable of responding in a timely manner to potential economic developments. Participants unanimously agree that monetary policy will be influenced by a series of subsequent data, economic outlook, and risk balance.

Participants assessed that the impact of the tariff increases has become more evident in certain commodity prices, but its overall impact on economic activity and inflation remains to be seen. They also noted that it will take time to gain a clearer understanding of the scale and persistence of the impact of the tariff increases on inflation.

Even so, some participants emphasized that a wealth of information can be gleaned from the data to be released in the coming months, which will help them assess the risk balance and set the federal funds rate appropriately At the same time, some participants pointed out that waiting for the impact of tariffs on inflation to become fully clear before adjusting monetary policy stances is neither feasible nor appropriate.

Some participants emphasized that whether the impact of tariffs on inflation can persist largely depends on the stance of monetary policy.

Several participants commented that the current target range for the federal funds rate may not be far above neutral levels; factors supporting this assessment include that broader financial conditions may remain neutral or conducive to enhanced economic activity.

Stablecoins May Increase Demand for U.S. Treasuries, High Attention on Impact on Financial System and Monetary Policy

The minutes show that during discussions on financial stability, participants noted that they believe there are some vulnerabilities in the financial system that need to be monitored. Several participants pointed out that the pressure from high asset valuations is concerning.

A few participants discussed the vulnerabilities in the U.S. Treasury market, expressing concerns about the ability of market makers to act as intermediaries, the increasing participation of hedge funds, and the lack of market depth making the Treasury market fragile.

Regarding banks, a couple of participants noted that although regulatory capital levels remain robust, some institutions may still face risks from rising yields over the long term and related unrealized losses on bank assets.

A couple of participants discussed foreign exchange swaps, pointing out that these tools are a key source of dollar financing for foreign financial institutions providing dollar loans to their U.S. and overseas clients, but they also carry vulnerabilities due to maturity mismatches and rollover risks.

Many participants also discussed the recent and future developments of stablecoins and their potential impact on the financial system.

Participants noted that following the passage of the GENIUS Act, the use of stablecoins may increase and could help enhance the efficiency of payment systems. They also stated that stablecoins may drive up demand for their underlying assets, including U.S. Treasuries.

Participants expressed concerns about the broad impact that stablecoins may have on the banking system, financial system, and the execution of monetary policy, believing that this area deserves high attention, including closely monitoring the various assets used to support stablecoins