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

Most Federal Reserve officials judged that another increase in the benchmark interest rate would probably be appropriate before year-end, according to minutes of the September Federal Open Market Committee meeting. Even so, markets are leaning toward a pause this month after employment and inflation data softened following that meeting.

The minutes, released on Oct. 7, showed that most participants saw a strong possibility that one more rate hike this year would be appropriate. At the Sept. 15-16 meeting, the Fed raised its policy rate by 0.25 percentage point to 3.75% to 4.00%. At the time, 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. Others went further, saying 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 shifts in the economic outlook.

Officials also pointed to energy prices and artificial intelligence investment as key inflation risks. They said rising oil prices tied to geopolitical tensions and heavier spending on AI infrastructure were complicating the path to price stability. Inflation could prove more persistent if higher energy costs spread to other industries or if AI-related demand outpaces supply expansion. The possibility of additional tariff increases was also cited as a factor that could push prices higher.

Some participants also questioned whether current rates are restraining economic activity enough. A number of officials said they had raised their estimates for the neutral rate, which neither overheats nor slows the economy. Several participants judged that the current policy rate was either not restrictive or only mildly so. They also said financial conditions, including rising stock prices and narrow corporate bond spreads, were still supporting growth.

Data released after the meeting, however, painted a different picture from the one reflected in those discussions. Nonfarm payrolls for September, released on Oct. 2, increased by just 29,000. August personal consumption expenditures inflation also came in below expectations. Those shifts will be among the changes the Fed weighs in deciding the timing of any additional rate increase after officials described the labor market as stable at the September meeting.

In markets, some investors see the December meeting rather than October as the key juncture for any further hike. MUFG put the odds of a December move at about 55% to 60%, citing energy prices and PCE inflation data as the main variables. CME FedWatch shows an 82.8% probability that the Fed will leave rates unchanged at the Oct. 27-28 FOMC meeting. The Wall Street Journal said the minutes confirmed a signal for another hike this year, but suggested there was no need for the Fed to rush in October.