The Federal Reserve released minutes from its September Federal Open Market Committee meeting on Wednesday, revealing a broadly hawkish stance. All 19 policymakers supported the quarter-point increase that lifted the federal funds rate to a range of 3.75% to 4.00%, the first hike since July 2023. Most participants assessed that another increase in the target range would likely be appropriate by year-end, according to the minutes.
Officials cited differing reasons for additional tightening. Some pointed to the need to limit the impact of energy and other price shocks, while others were more concerned about demand-driven inflation. The minutes said risks to inflation were skewed upwards, with several participants noting that underlying economic momentum appeared to have increased. Many policymakers argued another hike could provide insurance against inflation remaining above the Fed's 2% target.
The meeting also highlighted rapid growth in artificial intelligence infrastructure investments. Some officials warned that the AI investment boom could push aggregate demand above the economy's supply capacity, creating additional inflationary pressure. Officials generally viewed the labor market as close to full employment and described financial conditions as supportive, despite the recent rise in longer-term Treasury yields.
Despite the hawkish tone, market expectations for an October rate increase have fallen. Investors priced roughly a 20% probability of a quarter-point move at the October 27-28 meeting, down from around 70% after the September decision. Two-year Treasury yields declined more than 10 basis points over the prior week to about 4.76%. Fed Vice Chair Philip Jefferson and New York Fed President John Williams said policymakers had time to assess the economy before deciding on another increase.
Tom Graff, Chief Investment Officer at Facet, said the minutes supported the case for an October hike and showed limited concern about Treasury market volatility. He noted that the September meeting occurred before the weaker September jobs report, so officials may have more labor market concerns by the October meeting. The next consumer price data, due October 14, could also influence the policy debate.
