Fed minutes: most officials saw another rate hike as likely by year-end

Most Federal Reserve officials thought another interest-rate increase would likely be appropriate by the end of the year when they raised rates in September, and several described the policy rate as not restrictive or only mildly so, according to minutes of the meeting released Wednesday.

All participants at the Sept. 15–16 meeting supported raising the federal funds target range by a quarter point to 3.75% to 4%, and the 12 voting members approved it without dissent. Looking past that meeting, "most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end," the minutes said. The same paragraph added that officials approach each meeting "with an open mind" and that future decisions depend on incoming information.

That is a sharper message than the post-meeting statement, which gave no guidance on the next move. It lines up with the projections officials published at the meeting: the median forecast for the federal funds rate at the end of 2026 was 4.1%, up from 3.8% in June and consistent with one more quarter-point increase from the current range, with the same 4.1% at the end of 2027, meaning no cut next year.

Why officials wanted a higher rate

Participants said they "had not seen sufficient progress on lowering inflation in recent months." Fed staff estimated that inflation measured by the personal consumption expenditures price index edged up to 3.8% in August from a year earlier, with core inflation, which strips out energy and many food prices, at 3.4%. Under a new method the Commerce Department's Bureau of Economic Analysis was about to adopt, the staff put those readings at 3.6% and 3.2%.

Officials pointed to oil and fuel prices pushed up by geopolitical developments and to heavy spending on artificial intelligence as sources of price pressure. Some said that after more than five years of inflation above 2%, high inflation could begin to affect expectations and how businesses set wages and prices.

The minutes describe two lines of reasoning for the increase. Many participants called a higher path for rates prudent as insurance against inflation staying above target, while a number said their main forecast called for it. A couple said they had raised their estimate of the neutral rate, the level that neither speeds up nor slows the economy.

Officials' view of jobs had also shifted. A majority said the labor market had strengthened a bit recently, and almost all judged that risks to employment had diminished and were now broadly balanced, while inflation risks were tilted to the upside. The unemployment rate was 4.1% in July and August.

What the minutes say about bond yields

The Fed's markets desk told officials that Treasury yields had risen about 0.35 percentage point across two- to 10-year maturities between the July and September meetings. Part of the rise reflected expectations of higher Fed rates and strong economic data. Market commentary also blamed geopolitical developments, uncertainty about the Treasury's buyback program and competition for capital from heavy borrowing to build AI infrastructure for pushing up the extra yield investors demand to hold longer-term bonds.

Policymakers did not treat the rise as a brake on the economy. Many said that despite higher long-term yields, financial conditions "appeared to be supportive of economic growth," citing big stock gains this year and narrow corporate bond spreads. A few noted that housing was the exception, with mortgage rates still elevated. A few officials said that while the Treasury market was working smoothly, the Fed should plan for stress there and strengthen its tools for dysfunction while limiting its footprint in that market.

On Wednesday the 10-year and 30-year Treasury yields touched their highest levels since 2002 before easing ahead of a 1 p.m. auction of 10-year notes that drew strong demand. The Treasury sold $39 billion at a high yield of 5.3%, with bids worth 2.77 times the amount offered, and primary dealers took about 2.5% of the competitive bids accepted. At 2:03 p.m. Eastern time, after the minutes were out, the 10-year yield was 5.29% and the 30-year yield was 5.67%. The S&P 500 was down about 0.3%.

What comes next

The minutes are a record of a discussion three weeks old, not a decision about the next meeting, which is Oct. 27–28. The Fed staff projected that inflation would reach 2% only in 2029, and participants generally saw inflation risks tilted to the upside, with some saying those risks had grown in recent months.