Fed Minutes: Most Officials See Another Rate Hike by Year End, No Date Set

Since the Federal Reserve raised its benchmark rate a quarter point to 3.75%-4.00% on Sept. 16, the open question has been how soon the next increase comes. The minutes of that meeting, released Wednesday, answer "by year end" and nothing more specific.

The key line: "most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end." The document gives no month.

What the minutes say

Every participant backed the September hike. The vote was unanimous, even though several key officials had earlier signaled reluctance, according to CNBC.

Many participants called a higher rate path prudent on risk-management grounds. The minutes describe it as "insurance against inflation remaining persistently above target due to stronger-than-expected demand or further adverse supply shocks."

A separate group went further and said higher rates were warranted by their own central outlook for the economy, not just as insurance.

Several officials judged the current policy rate to be either not restrictive or only mildly restrictive. Several also said underlying economic momentum had picked up.

The labor market was described as close to maximum employment, with unemployment at 4.1%.

Inflation and the AI buildout

Fed staff estimated August headline PCE inflation at 3.8% and core at 3.4% at the time of the meeting. Under a forthcoming Bureau of Economic Analysis methodology change, those estimates would be 3.6% and 3.2%.

Staff raised their inflation forecasts for 2026 through 2028 and now project a return to the 2% target in 2029. Inflation has run above target for more than five years.

The minutes name higher energy prices tied to geopolitical tensions and heavy investment in AI infrastructure as sources of price pressure. Some officials warned the AI buildout could push demand above supply over the medium term. Business contacts reported rising costs, and some participants said companies were increasingly able to pass those costs on to customers.

Treasury yields rose roughly 35 basis points across maturities from two to 10 years between meetings. Market commentary cited heavy borrowing to finance AI infrastructure as one factor. Many officials said strong equity prices and narrow corporate credit spreads still left financial conditions supportive of growth. Elevated mortgage rates continued to weigh on housing.

October looks unlikely, December is open

Chairman Kevin Warsh set expectations at his Sept. 16 news conference. He described the hike as removing "a dose of accommodation," a phrase Wall Street analysts read as a sign more increases were coming. Markets began betting on another move at the Oct. 28 meeting.

The data since then have pushed the other way. CNBC reports that the August PCE price index came in at 3.4% headline and 3% core. Both are well above the 2% target, but lower than expected, in part because of changes in how some inputs are calculated. Those figures sit below the staff estimates in the minutes, which were made before the data were published. CNBC also reports that recent comments from leading Fed officials point to no October hike.

The minutes themselves push back on any firm schedule. Participants "emphasized, however, that they approached each meeting with an open mind and decisions at future meetings would depend on incoming information and its implications for the outlook and the balance of risks." Officials stressed that another hike is not predetermined.

The committee's own projections show one more hike this year and none in 2027. Of the 18 officials who submitted forecasts, 16 expect another increase. Warsh, who took the job in May, has not submitted a forecast.

The two remaining decision points are Oct. 28 and Dec. 9. Whether the second hike comes at the first or the second depends on inflation data that the minutes say the committee will weigh meeting by meeting.