Fed July FOMC Minutes: Hawkish Undertones and AI Risk Warnings

On August 19, the Federal Reserve released the minutes from the July 28–29 FOMC meeting. Although interest rates were held steady at 3.50%–3.75% for the fifth consecutive time, the minutes signaled a more hawkish stance than the post-meeting statement and issued an explicit warning about financial risks associated with the AI investment boom for the first time, triggering sharp divergence across US equity sectors.

Key Takeaways

The camp favoring rate hikes is far larger than the voting results suggest. At the July meeting, interest rates were held unchanged with a 9-3 vote. Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari all advocated for a 25-basis-point hike. However, the minutes further revealed that "several" participants were already inclined toward raising rates at the time, and non-voting members Kansas City Fed President Jeffrey Schmid and St. Louis Fed President Alberto Musalem also expressed support after the meeting. More critically, "many" officials (approximately half of the 19 policymakers) believed that further policy tightening would be "very likely necessary" if inflation did not decline, with some even stating outright that current financial conditions were not restrictive enough.

The inflation outlook remains highly uncertain. May PCE inflation stood at 4.1%, with core inflation at 3.4%, both significantly exceeding the 2% target. While most officials expect inflation to ease within the year as the effects of tariffs and energy prices fade, "many" remain wary that inflation could stay elevated for longer. The escalating conflict in Iran has further clouded the outlook, with continued disruptions to shipping in the Strait of Hormuz.

The AI boom has entered discussions on financial risks for the first time. The minutes devoted considerable space to discussing AI's impact on inflation and financial stability. Some officials believe AI's effect on consumer prices remains limited to specific categories, while others point out that AI investment has already had broader impacts by boosting aggregate demand. More alarmingly, several officials warned that the high valuations of AI-related companies are built on optimistic assumptions, and a significant downward revision in expectations could trigger widespread asset repricing. A few officials specifically noted that AI capital expenditure is increasingly reliant on debt financing, meaning that "risks are transmitting from the equity market to the credit system."

Chairman Walsh proposed reducing the number of meetings. Walsh suggested reducing the annual monetary policy meetings from eight to six to allow for the accumulation of more information, but this was only discussed, with the 2026 schedule remaining unchanged.

Impact on potential sectors

Bearish factorsThe AI and semiconductor hardware sectors bore the brunt of the sell-off. The Federal Reserve's explicit warning regarding AI valuation risks has shaken the core narrative underpinning the US stock bull market. The semiconductor ETF (SOXX) fell a cumulative 7.7% over two days, while memory storage stocks Seagate and Western Digital dropped 7.87% and 6.87%, respectively. The optical communication sector also declined broadly. Long-duration growth stocks and small-cap stocks faced pressure from rising discount rates. Real estate and REITs were dragged down by the 30-year Treasury yield hitting a new high since 2007, while redemption requests in the private credit market continued to rise.

On the positive sidesafe-haven assets strengthened across the board. Spot gold rose more than 4% to break through $4,500 per ounce, and silver gained over 5%. The biopharmaceutical sector surged after Moderna reported positive Phase III clinical trial results for its cancer vaccine, with its stock jumping 177% in a single day, leading healthcare stocks to outperform within the S&P 500. Ongoing conflicts in the Middle East continued to push oil prices higher, with WTI crude rising to $85.66 per barrel. Defensive value stocks and Bitcoin (which returned to the $69,000 level) both attracted capital inflows.

Outlook

On the day the minutes were released, the three major US stock indices ended their three-day losing streak with slight gains, although sector performance diverged significantly. Notably, retail sales recorded their largest decline in over a year following the July meeting, and employment data unexpectedly weakened. Consequently, the market has lowered the probability of a September rate hike from over 70% to approximately 35%. In the short term, the market is more likely to maintain a volatile and divergent pattern: a hawkish underlying tone suppresses high-valuation assets, but slowing economic data limits the scope for further rate hikes. Investors should closely monitor the PCE data on August 26 and the upcoming Jackson Hole Annual Symposium, where Governor Waller will deliver his first major speech since taking office.

Disclaimer:The above content is based on public data and quantitative analysis and is for reference only; it does not constitute investment advice. The market involves risks, so invest with caution. Any investment decision should be made independently based on personal risk tolerance, financial status, and investment objectives, consulting licensed professional institutions when necessary. Past performance does not indicate future returns.

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