Fed minutes show most policymakers expect another rate hike this year after September increase

The minutes support a hawkish interpretation of the Fed's trajectory, leaving a potential rate increase at the October or December meetings on the table and underpinning short-term Treasury yields. By explicitly connecting sustained high energy costs to wider inflation, the Fed treats oil as a direct factor in its rate decisions; additional supply disruptions from the Gulf would probably reinforce the argument for more tightening rather than be ignored. The dollar's outlook is tempered somewhat by monetary tightening overseas, as the ECB's rate hikes have reduced interest rate differentials. Equity investors might find reassurance in the officials' view that financial conditions remain favorable for economic growth.

The Fed's September rate increase was not an isolated move; the majority of its policymakers were already projecting an additional rate rise before year-end, with oil prices and the AI surge fueling inflation concerns.

• Every participant backed the 15-16 September decision to increase the fed funds target range by a quarter percentage point to 3.75-4%, passed by a 12-0 vote.
• A majority of participants believed another rate increase would probably be suitable by year-end, though they emphasized that decisions would hinge on upcoming data.
• Officials noted that progress on inflation had stagnated, attributing it to higher oil and fuel costs from geopolitical events and a boom in AI investment; they viewed risks as weighted to the upside.
• Fed staff projected headline PCE inflation at 3.8% in August and core at 3.4%, and they do not expect inflation to fall to 2% until 2029.
• The labor market was seen as close to full employment, with unemployment at 4.1% and most officials observing some recent improvement.
• Several policymakers considered current policy as not restrictive or only slightly so, and a couple had increased their estimates of the neutral rate.

According to the minutes of the 15-16 September meeting released Wednesday at 2pm Eastern (1800 GMT), all Federal Reserve policymakers backed the September rate hike, and a majority expected a further increase would likely be warranted before year-end.

The FOMC voted unanimously (12-0) to raise the federal funds target range by a quarter point to 3.75-4%. Participants cited still-high inflation, a labor market near maximum employment with some signs of improvement, and strong economic growth. Nearly all members judged that inflation risks were skewed to the upside but that employment risks had diminished and were now roughly balanced.

Officials stated that they had observed insufficient progress on reducing inflation in recent months. They highlighted geopolitical factors that had increased crude oil and refined fuel prices, as well as a surge in AI investment, as major sources of upward pressure. Many participants cautioned that the longer elevated energy prices persist, the higher the chance that cost increases in certain sectors would feed into wider price pressures. A few expressed concern that over five years of above-target inflation could start influencing expectations and wage- and price-setting behavior.

Fed staff estimated that the headline PCE price index increased 3.8% year-over-year through August, and the core measure rose 3.4%. Staff upwardly revised their inflation projections for 2026 through 2028 and forecast that inflation would not return to the 2% target until 2029.

Views diverged on why tightening was needed. Many participants considered a higher rate path prudent insurance against persistent inflation, while some saw it as necessary given their baseline economic forecasts. A couple said they had revised up their estimates of the neutral rate, and several indicated that policy was not restrictive or only mildly restrictive even after the hike.

Regarding the economy, officials noted that the magnitude and speed of AI investment had continued to exceed expectations and was driving business capital spending. Several observed that equity market gains were bolstering spending among higher-income households, while lower- and middle-income households were feeling the pinch from higher energy costs.

Going forward, participants said they would keep an open mind at each meeting. The FOMC's next gathering is scheduled for 27-28 October, where upcoming inflation figures and energy market developments will determine whether the next rate increase occurs sooner or later.