Federal Reserve officials were united on the September rate increase, even if they were not aligned on the reasoning behind it.
Minutes released Wednesday from the Sept. 15-16 Federal Open Market Committee meeting showed that all 19 senior Fed officials supported raising the federal funds target range by 25 basis points to 3.75%-4.00%. It was the central bank’s first rate hike since July 2023.
The minutes said that “most participants judged that a further increase in the target range for the federal funds rate later this year would likely be appropriate.” At the same time, officials said they would keep an open mind at each meeting, with future policy decisions tied to incoming information.
Nick Timiraos, the journalist often referred to as the “Fed whisperer,” highlighted the same passage, writing that most participants saw another increase in the federal funds target range as likely appropriate before the end of the year.
October hike expectations have faded
Since the meeting, weaker-than-expected employment data and comments from several officials signaling there was no need to rush have pushed markets toward expecting the Fed to stay on hold in October and consider another hike in December.
According to CME FedWatch, traders now assign less than a 20% probability to a 25-basis-point increase at the Oct. 27-28 meeting, down sharply from about 70% in the days following the September decision. The U.S. consumer price index report due on Oct. 14 could shape those expectations.
The 2-year Treasury yield has fallen by more than 12 basis points over the past week and is now near 4.78%. Because that maturity is among the most sensitive to Fed policy expectations, the decline points to a market view that the need for back-to-back tightening in the near term has eased.
Officials agreed on the move, not on the rationale
The minutes showed broad agreement that a hike was warranted in September, but they also revealed a split over whether the move was mainly precautionary or a response to wider inflation pressure.
“Many participants” said lifting the target range was a risk-management step that would provide insurance against inflation remaining above the 2% goal, especially if demand proved stronger than expected or supply conditions were hit again.
Others argued that a higher policy rate was necessary in its own right, aimed at preventing recent shocks such as higher energy prices from spreading into a broader range of goods and services prices. A smaller group said the increase matched their view that the neutral rate had moved higher.
The minutes also said some officials did not view the policy rate before the September move as sufficiently restrictive. “Several participants” said the rate at that point was “not restrictive or only somewhat restrictive.”
That leaves a clear distinction in the record: all 19 officials backed the September hike, but there was no single shared judgment that the Fed had entered a new phase requiring sustained aggressive tightening.
Most still saw one more hike this year, but not necessarily in October
On the policy path ahead, the minutes carried a hawkish tone overall, though they stopped short of showing that an October move was locked in.
The document said that “most participants judged that a further increase in the target range for the federal funds rate later this year would likely be appropriate,” indicating that, as of the September meeting, most officials still expected at least one more increase before year-end.
Even so, they stressed that they would remain open-minded from one meeting to the next and would base decisions on the flow of new data. That language broadly matched recent public remarks from Fed officials.
New York Fed President John Williams and Fed Vice Chair Philip Jefferson have both said recently that the central bank has time to assess the economy and does not need to rush into another increase. Their comments quickly led markets to trim October hike bets.
A weaker-than-expected September U.S. jobs report also reduced expectations for a move this month. Investors now lean toward a pause in October, followed by a possible second hike of the year in December after more inflation and labor-market data arrive.
Inflation risks remain tilted upward, with AI investment discussed in the minutes
Although the Fed sees inflation gradually cooling, officials said they still lacked enough confidence in the pace of that decline.
The minutes showed that almost all participants viewed inflation risks as tilted to the upside, and some said that tilt had strengthened in recent months. Officials pointed to rising energy prices, geopolitical risks and tariffs as factors that could keep inflation elevated for longer than expected.
The AI investment boom also appeared in the discussion as a source of upside inflation risk. Some officials said AI was driving investment and improving the productivity outlook, but could also lift inflation through stronger demand, higher input costs and greater financing needs. Strong demand for skilled labor in AI-related industries could also push wages higher in those jobs.
The minutes said AI buildout was driving business investment and that its scale and pace were “continuing to exceed expectations.”
Some officials also noted that core goods prices were still rising at a relatively firm pace. As AI-related buildout expands, the demand and cost pressure it creates could offset part of the inflation relief coming from a fading tariff effect.
Economic resilience and supportive financial conditions stayed in focus
The resilience of the U.S. economy formed an important backdrop to the September decision.
The minutes said several officials saw stronger underlying momentum in the economy. Consumer spending remained resilient, business investment was supported by AI infrastructure buildout, and overall activity continued to expand at a fairly solid pace.
At the same time, the labor market was seen as close to full employment.
Financial conditions were also not viewed as restrictive enough to materially slow growth. Even though longer-dated Treasury yields had risen noticeably, many officials said overall financial conditions still supported economic expansion, citing a strong rise in stock prices this year and relatively narrow corporate bond credit spreads.
The minutes said yields on Treasuries from 2 years to 10 years had risen by about 35 basis points over the relevant period. Officials said changes in real rates were one of the main reasons longer-term Treasury yields had moved higher.
Market participants also pointed to geopolitical developments, uncertainty around the U.S. Treasury’s buyback plan, and heavy private debt issuance used to finance AI infrastructure as important drivers of higher term premiums and Treasury yields.
Late-July yen support operation did not use Fed funds
The minutes also said the U.S. action taken with Japan in late July to support the yen was carried out by the Treasury Department and did not use the Federal Reserve’s own funds.
According to the document, the New York Fed conducted the intervention “solely as fiscal agent for the U.S. Treasury,” using Treasury money. The Fed’s System Open Market Account, or SOMA, portfolio was not involved. That portfolio holds U.S. government securities and other assets owned by the Federal Reserve.
The minutes did not disclose the exact timing or size of the intervention. Treasury Secretary Bessent said last month that the United States used only a “minuscule” amount of money in the operation and said the move was in the U.S. interest.
Yen weakness has become a growing concern for Japanese policymakers because it raises import prices and household living costs. At the same time, Trump criticized the weak yen, saying it gave Japanese manufacturers an unfair trade advantage.
The late-July operation marked the first joint intervention by Tokyo and Washington in nearly 30 years to support the yen. Data from Japan’s Ministry of Finance showed that, in the month through Aug. 26, Japan spent a record 15.4 trillion yen, or about $97.5 billion, on currency intervention.
Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Bessent have both signaled that the two countries could intervene again if needed.