September FOMC Minutes: Consensus on Another Hike This Year... October Hold Seen as More Likely

Most See Need for One More Rate Hike This Year
No Signal of an October Hike; Markets Lean Toward a Hold
Focus on September CPI Report

A consensus has emerged within the Federal Reserve (Fed), the U.S. central bank, that another increase in the benchmark interest rate may be needed before the end of the year. The growing view is that policymakers will keep a close watch on inflation while assessing recent developments in the labor and financial markets before deciding when to tighten policy further.

September FOMC minutes. Fed

According to the minutes of the September Federal Open Market Committee (FOMC) meeting released by the Fed on October 7 (local time), most participants judged that “it would likely be appropriate to raise the target range for the federal funds rate once more by the end of the year.”

However, the minutes did not signal that the next tightening move would come at the October FOMC meeting. They emphasized that “participants remain open-minded at each meeting, and future decisions will depend on incoming information.” In other words, the Fed left open the possibility of tightening again this year but did not say whether it would raise rates at the October FOMC meeting.

Fed unanimously backs September hike; inflation concerns persist

At its September FOMC meeting, the Fed raised the benchmark interest rate by 0.25 percentage points for the first time in three years, setting it at 3.75%-4.00%. The minutes confirmed that there was strong internal agreement on the move. All meeting participants supported the rate increase, and all 12 voting members voted in favor.

The persistent failure to bring inflation under control was behind the rate hike. According to the minutes, many participants said higher rates were needed to guard against the possibility that inflation could remain above expectations because of stronger-than-expected demand or additional supply shocks. Some participants saw further tightening as justified not merely as a risk-management measure, but by the economic outlook itself.

Some participants, in particular, described the benchmark interest rate before the September increase as “not restrictive, or only mildly restrictive.” This suggests they believed monetary policy needed to be tightened further to bring inflation back to its target level.

Assessments of the U.S. economy were also stronger than expected. Some participants said “the underlying momentum of the economy appears to have strengthened.” Bloomberg reported that some also said financial conditions continued to support economic growth: although long-term Treasury yields had risen sharply, stock prices had climbed considerably this year and corporate bond spreads remained low.

This explains why the Fed has been reluctant to rule out further tightening, even after raising its benchmark rate last month. At a press conference following the September FOMC meeting, Fed Chair Kevin Warsh said prices were rising faster than the Fed wanted across too many categories. He explained that the latest increase was intended to “remove some of the accommodative elements” that remained in the economy.

Calls emerge for a slower pace of rate hikes... October hold seen as more likely  

The yield on the 2-year U.S. Treasury note has fallen by more than 10 basis points (1 bp = 0.01 percentage point) over the past week, according to Investing.com.

However, the mood has shifted somewhat since the September FOMC meeting. In recent speeches, New York Fed President John Williams and Fed Vice Chair Philip Jefferson each said there was time to assess economic conditions further, while not ruling out the possibility of another rate increase.

Employment data released on October 3 also strengthened the case for not rushing into another hike. Average hourly earnings rose 3.0% from a year earlier, their slowest pace in more than five years. With concerns about wage-driven inflation easing, the data were interpreted as showing no clear signs of either overheating or cooling in the labor market.

As a result, the implied probability of a rate hike has fallen again in the federal funds futures market. The probability of an additional 0.25-percentage-point increase briefly surged to 70% shortly after the September FOMC meeting, but has now fallen to around 20%. The 2-year U.S. Treasury yield, which is sensitive to monetary policy, has also dropped by more than 10 basis points over the past week to around 4.7%.

The next major turning point is expected to be the release of the September Consumer Price Index (CPI) on October 14. If inflation comes in stronger than expected again, the likelihood of another rate hike is expected to rise. Conversely, if both inflation and employment growth slow, the Fed is expected to hold rates steady in October and then decide whether to raise them again in December.

This content was produced with the assistance of AI translation services.