Fed Minutes Show Most Officials See Another Rate Hike by Year-End, But Data Shift Tempers Near-Term Bets

Most Federal Reserve officials expect another interest rate increase will be needed before the end of this year, according to minutes from the central bank’s Sept. 15-16 policy meeting released Wednesday.

The Federal Open Market Committee voted 12-0 to raise its benchmark rate by a quarter percentage point to a range of 3.75% to 4% — the first increase since 2023. Support extended beyond voting members, with every participant in the meeting backing the move.

“Most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end,” the minutes said, though officials stressed future decisions would depend on incoming data.

**Inflation Remains Stubborn**

The driver was persistent inflation. Fed staff estimated that prices rose 3.8% in August from a year earlier, as measured by the central bank’s preferred gauge, well above the 2% target. Staff economists projected inflation would not return to 2% until 2029, according to the minutes.

Officials pointed to higher energy prices, pushed up by conflict in the Middle East, as a central concern. Many warned that the longer those prices stay elevated, the greater the risk they feed into broader price increases.

The minutes also flagged a newer source of pressure: the artificial intelligence boom. Staff attributed part of the inflation rise to higher prices for technology-related consumer goods tied to the AI buildout, and some officials said AI investment could push demand ahead of supply.

**Debate Over Rationale**

The minutes revealed a split among officials over why the September hike was necessary, according to reports from Bloomberg and the Korea Times. Some participants saw the increase as insurance against persistent inflation on risk-management grounds. Others viewed it as a shift toward significantly tighter policy needed to rein in demand-driven pressures. A handful of officials framed their support as matching a higher estimate of the neutral rate of interest.

Several officials stated that they viewed the policy rate before the September hike as “not restrictive or only mildly restrictive,” the minutes said. That view, echoed in separate comments, suggests some policymakers would support multiple rate increases.

**Labor Market Weakens, Market Bets Shift**

The minutes capture the Fed’s thinking before a key shift in the data. At the meeting, a majority of officials believed the labor market had strengthened. But the September jobs report, released Oct. 2, showed employers added just 29,000 jobs while unemployment rose to 4.2%.

That weaker reading, combined with subsequent comments from top Fed officials, has changed the rate outlook. Fed Vice Chair Philip Jefferson said last week that policymakers “will need to come to our own judgement, which may take more time,” as reported by the New York Post. New York Fed President John Williams also indicated the central bank has time to assess the economy.

Investors have pared back expectations for a move this month. Based on federal funds futures, traders on Wednesday priced in roughly a 20% chance of a quarter-point hike at the Oct. 27-28 meeting, down from around 70% in the days following the September decision, according to Bloomberg’s account of the minutes. Yields on two-year Treasuries dropped more than 10 basis points in the past week.

**Political Pressure and October Risks**

The rate increase defied President Donald Trump’s repeated calls for cuts and prompted him to criticize the Fed’s rate-setting committee as “very political,” though he expressed support for Chairman Kevin Warsh, whom he appointed earlier this year.

The minutes noted that many officials commented that financial conditions — including rising stock prices — “appeared to be supportive of economic growth,” despite higher longer-term Treasury yields. That observation suggests more tightening may be needed to cool the economy.

Some officials who voted against holding rates steady in July could dissent in favor of another increase if the majority votes to leave rates unchanged at the October meeting.

The Fed is scheduled to meet again Oct. 27-28 and for a final time in 2026 on Dec. 8-9. The year-end language in the September minutes leaves room for officials to wait until December, when they will have two more months of inflation and jobs data to weigh.