Fed Minutes Show Tilt Toward Another Rate Hike This Year; October Pause Seen as More Likely

Federal Reserve officials largely favored one more interest-rate increase before the end of the year, according to minutes of the September Federal Open Market Committee meeting released on October 7. Still, markets are leaning toward a pause this month after employment and inflation data cooled following the September meeting.

The minutes showed that most participants judged another rate increase this year would likely be appropriate. At its September 15-16 meeting, the Fed raised its benchmark rate by 0.25 percentage point to 3.75%-4.00%. Officials cited elevated inflation, a labor market near full employment and solid economic activity as reasons for the move.

Views diverged on the need for further tightening. Most participants said rates may need to stay higher to guard against stronger-than-expected demand or supply shocks. Some said additional hikes were warranted not merely as insurance against risks, but because their most likely economic outlook itself called for more tightening. Even so, officials maintained that future decisions would depend on incoming data and changes in the economic outlook.

Officials identified energy prices and artificial intelligence investment as key inflation risks. They said higher oil prices driven by geopolitical tensions and expanding investment in AI infrastructure were complicating efforts to stabilize prices. Inflation could prove more persistent if rising energy costs spread across industries or if demand tied to AI investment outpaces supply expansion. The possibility of additional tariff increases was also cited as a factor that could push prices higher.

Questions were also raised about whether current rates are restraining economic activity enough. Some participants said they had lifted their estimate of the neutral rate, or the level that neither overheats nor slows the economy. Several officials said the current policy rate may not be restrictive, or may be only modestly restrictive. They also viewed financial conditions, including rising stock prices and narrow corporate bond spreads, as still supporting growth.

Data released after the meeting, however, painted a different picture from the Fed's assessment at the time. Nonfarm payrolls for September, released on October 2, rose by just 29,000. August personal consumption expenditures inflation also came in below expectations. Those shifts are a factor the Fed will have to weigh when deciding the timing of any additional rate increase after characterizing the labor market as stable at the September meeting.

Some market participants see the December meeting, rather than this month, as the key juncture for any additional hike. MUFG put the odds of a December increase at about 55%-60%, citing energy prices and PCE inflation as the main variables. CME FedWatch shows an 82.8% probability that the Fed will leave rates unchanged at the October 27-28 FOMC meeting. The Wall Street Journal said the signal for one more hike this year has emerged, but there is no need for the Fed to rush in October.