The Federal Reserve’s September meeting minutes, released on Wednesday (Oct 7), showed most officials believed another interest rate increase may still be needed before the end of the year to curb inflation that remains peRSIstently above target. However, the document did not specify the timing for the next move. Recent inflation data that fell short of forecasts and cautious remarks from several officials have cooled expectations for an immediate rate hike in October.
The Fed will announce its remaining two rate decisions for this year on October 28 and December 9. Although further tightening remains the expected policy path for most officials, they stressed that they would approach each meeting with an open mind and make decisions based on incoming data and its implications for the economic outlook and risk balance.
Most Officials Expect Another Rate Hike Before Year-End
On September 16, the Fed unanimously agreed to raise the federal funds rate target range by 25 bASIs points to 3.75%–4%. The minutes noted officials judged that still-elevated inflation, a labour market near full employment, and solid expansion in economic activity supported the policy rate increase.
Most participants assessed that another increase in the federal funds rate target range would likely be appropriate before year-end. Many officials favoured a higher rate path from a risk-management perspective, seeking insurance against peRSIstent inflation that could stem from stronger-than-expected demand growth or new adverse supply shocks.
This inclination was also reflected in the September economic projections. Among the 18 officials who submitted forecasts, 16 expected at least one more rate hike before the end of the year. The median rate projection pointed to one additional hike this year, followed by steady rates in 2027. Fed Chair Kevin Warsh has not submitted personal economic projections since taking office in May this year.
Why Have October Rate Hike Expectations Cooled?
Warsh delivered hawkish remarks on inflation at the post-meeting press conference in September and described the hike as removing “some accommodation”. That comment was interpreted by Wall Street as a potential signal for further tightening, and markets briefly ramped up bets for another move in October.
Still, inflation figures released after the meeting gave policymakers more room to wait. The Fed’s preferred personal consumption expenditures (PCE) price index showed core inflation rose 3% year-over-year in August, with headline inflation at 3.4%. Both readings remained well above the 2% target but came in below prior estimates, partly due to methodological adjustments to statistical components.
At the same time, multiple Fed officials emphASIsed that the central bank did not need to rush into another hike and could first observe economic trends and the effects of the September policy adjustment. While another increase before year-end remains possible, it does not mean the Fed has committed to acting in October.
Inflation Expectations and Treasury Yields Continue to Pose Headwinds
What keeps Fed policymakers alert is that inflation has stayed above target for more than five consecutive years. Officials warned that if price increases remain elevated for too long, they may affect public inflation expectations and further feed into wage and corporate pricing decisions.
Short-term inflation expectations have also shown signs of heating up. A survey released by the New York Fed on Wednesday showed consumer expectations for price gains over the next 12 months rose to the highest level since May 2023. Market-based inflation gauges remain elevated, indicating the recent improvement in data has not fully erased price pressures.
US Treasury yields have also kept climbing, hovering near levels not seen since 2002. The minutes discussed multiple factors behind the yield surge, including market expectations for higher policy rates, robust economic growth, and heavy financing demand driven by AI infrastructure investment.
Staff members also noted uncertainty stemming from the US Treasury’s announcement and implementation of a bond buyback program may have contributed to higher yields. Treasury Secretary Scott Bessent announced an expansion of repurchases for outstanding long-dated Treasuries in August, yet the program has not visibly pulled down long-term yields.
For markets, the next focus is whether the improvement in inflation can peRSIst and whether new data will allow the Fed to delay tightening. Most officials still expect another rate hike before year-end, but the exact timing will depend on subsequent economic performance.