Federal Reserve officials broadly agreed at their meeting last month that they would need to raise interest rates if inflation remains stubbornly high this year due to factors such as the Middle East conflict, tariffs, or robust demand driven by the artificial intelligence (AI) investment boom.

At the same time, meeting minutes released on Wednesday showed that most officials believe the Fed could maintain rates at their current level, or eventually cut them, if inflationary pressures dissipate relatively quickly.

This written record from the first policy meeting chaired by Kevin Warsh underscores a significant shift in the economic outlook, reversing the focus from earlier this year when officials were considering what conditions would warrant rate cuts. Now, the focus has shifted to whether rates need to be increased.

At the June 16-17 meeting, Fed officials voted unanimously to hold the benchmark interest rate steady in the 3.5% to 3.75% range, where it has been since last December. They removed any hints about future policy changes from their policy statement.

Despite this, investors viewed last month's meeting as a step towards higher rates, as interest rate projections showed more participants anticipating hikes. Among the 18 participants, nine penciled in at least one rate increase by December, whereas no one projected this in March. Only one participant projected a rate cut, down from twelve in March.

Chair Warsh did not submit a projection, but his repeated vows to achieve price stability, coupled with no signals for patience, reinforced the impression that the committee is leaning towards tighter policy.

The minutes, released with the usual three-week lag, show growing concern about the inflation outlook. More officials pointed to strong business investment from AI infrastructure as a new force potentially sustaining price pressures. "Several participants commented that price pressures had become more widespread, with a large share of goods and services...experiencing significant increases," the minutes stated.

Ahead of last month's meeting, a prominent worry was that the Middle East conflict and its resulting higher energy costs could spread into more persistent inflation. This concern eased somewhat just before the meeting as a preliminary agreement was reached to resume shipping through the Strait of Hormuz, leading to a sharp drop in oil prices.

Fed officials leaned into this sense of relief. New York Fed President John Williams said on Tuesday that policy is in a good place and he expects the Fed's preferred inflation measure—currently near 4%—to decline "month by month over the next few months as energy prices fall." San Francisco Fed President Mary Daly, speaking in Spain last week, said, "Oil prices coming back down around $70 a barrel is very good news for consumers and the economy."

However, the premise of falling oil prices faces new questions after Iran's attacks on merchant ships drew fresh U.S. strikes, and President Trump announced an end to a ceasefire with Iran on Wednesday. Trump suggested seizing an Iranian oil export hub and reimposing a maritime blockade.

Even if the Strait of Hormuz remains calm, price pressures are building from another direction: the AI investment boom. Officials noted the surge in spending on data centers and computing power as a significant source of demand that the economy is struggling to meet.

Several officials pointed out that a year ago, the Fed could have viewed tariff-driven price increases as one-off events and let them pass without a policy response, as the job market was weak enough to justify patience. Now, with hiring more stable and new cost pressures emerging simultaneously from energy and AI, that same instinct to wait carries greater risk that above-target inflation could become entrenched.

Between September and December of last year, the Fed cut rates three times, with most officials willing to tolerate above-target inflation for a slightly longer period to avoid the risk of a cooling labor market tipping into a faster, self-reinforcing rise in unemployment—a spiral that is hard to reverse once it starts.

In recent months, the labor market has stabilized, and "inflation has been surging, so that changes the way you might want to think about policy," said Fed Governor Christopher Waller, a key advocate for last year's rate cuts, during a panel discussion in Rome on Monday.

The combination of a resilient economy and new sources of price pressure has intensified the debate facing the committee ahead of its July 28-29 meeting. Last week's weaker-than-expected June jobs report, suggesting less risk of a re-accelerating labor market, may instead strengthen the case for patience. Officials will receive June consumer price data next week.

The Fed faces a dilemma: while the job market is not a clear source of inflationary pressure, it is also not clearly helping to pull inflation down. Tariffs, followed by oil, and now the AI boom have arrived in overlapping waves, each testing the central bank's instinct to look past one-off price jumps. These factors have raised concerns that, in combination, they could leave a more lasting imprint on how households and businesses set wages and prices.

"Are they just 'look-throughable' shocks because they're not going to last forever, or do they seep into the economy in some fundamental way and change things?" San Francisco Fed President Mary Daly said last week. Moving too quickly could slow an economy that doesn't need restraining, but moving too slowly could allow inflation to worsen. "These are the trade-offs," she said.

At a conference in Portugal last week, Chair Warsh dismissed complaints that investors need more clarity on how the Fed will adjust as the outlook changes. He pointed to changes in several market indicators after last month's meeting—lower interest rate volatility, declining Treasury yields, and expectations that inflation will fall over the next year or two—as evidence that his commitment to lowering inflation while maintaining a constructive ambiguity about the Fed's strategy is succeeding.

"I hear this narrative as if people don't understand," he said. "I think they actually understand very well."