Fed Minutes Indicate Most Officials See Another Rate Hike by Year-End

Before the minutes were released, the market saw a 19% probability of a rate increase this month and had fully priced in one for December.

Key points from the minutes:

• Every participant voted for a rate increase to a range of 3.75% to 4.00%.
• A majority of participants indicated that another rate increase would probably be appropriate by the end of the year.
• Nearly all members judged that labor market risks had decreased and were now roughly in balance.
• Most participants noted that the labor market had firmed up somewhat recently.
• Inflation risks were tilted to the upside, with some noting they had become more skewed in recent months.
• Many participants viewed a higher rate path as prudent from a risk-management perspective.
• A number of officials said a higher path was required based on their central forecast.
• Several participants saw the current policy rate as not restrictive or only mildly so.
• A couple of members raised their estimate of the neutral rate.
• Some expressed concern that after more than five years of above-target inflation, expectations and wage and price setting could be impacted.
• Many said that the longer energy prices remain elevated, the greater the risk of broader price pressures.
• Some noted that the AI buildout could boost demand ahead of supply over the medium term.
• Many said that financial conditions remained supportive of growth despite higher Treasury yields.
• Staff projected August PCE at 3.8% headline and 3.4% core. Under the new BEA methodology, those figures were 3.6% and 3.2%.
• Staff does not expect inflation to return to 2% until 2029.

The vote was 12-0, but the minutes revealed that all participants backed the decision, including the seven nonvoters. Two weeks before the meeting, Waller and Williams had been considering a pause, but the August CPI report completely ended that possibility.

Market attention will center on the statement that "most participants assessed that another increase... would likely be appropriate by year end." The wording is key: "by year end" rather than "at the next meeting." This is the same escape hatch Williams used in Buffalo on September 29 when he said there was "no need for urgency."

Several participants do not view policy as restrictive at 3.75-4.00%. A couple increased their neutral rate estimates. A "number" of officials required the hike based on their central forecast, not as insurance. This group includes Logan, Hammack, and Kashkari, and it has grown beyond three. With officials arguing that a 4% fed funds rate is barely restrictive while core PCE stands at 3.4%, the debate on the terminal rate is not limited to a single additional hike.