Fed minutes: Most officials backed another rate hike this year, but gave no signal on timing

Most Federal Reserve officials judged it appropriate to raise the benchmark interest rate one more time before the end of the year, but stopped short of signaling that an additional hike was needed at this month's Federal Open Market Committee meeting.

According to the minutes of the September FOMC meeting, released Wednesday (local time), "most" participants said it would be appropriate to raise the federal funds rate (FFR) target range one more time before year-end.

The minutes, however, contained no specific language suggesting the need for an additional hike at the next FOMC meeting, scheduled for Oct. 27-28.

The minutes said participants were approaching each meeting with an "open mind" and that future rate decisions would depend on incoming economic data and how that information affected the outlook for the economy and the balance of risks.

The Fed raised its benchmark interest rate by 25 basis points to a target range of 3.75-4.00 percent at the Sept. 15-16 FOMC meeting — its first rate increase in three years and two months since July 2023 — with all 12 voting members in favor.

The minutes also revealed internal disagreement over the rationale for raising rates further.

"Many" participants viewed last month's rate hike as a form of "insurance" against the risk that inflation could remain above target due to stronger-than-expected demand or additional supply shocks — framing the move more as risk management against an unexpected inflation scenario than as a step required by the baseline economic outlook.

Some participants, by contrast, said the baseline economic outlook itself called for higher rates, going beyond mere risk management.

"A couple of" participants expressed concern that price increases in certain sectors — stemming from energy market disruptions and AI-related demand — could spread across the broader economy and prolong inflation. They argued that maintaining a high benchmark interest rate would be necessary to prevent that outcome.

There was also disagreement over whether current rates are sufficiently restrictive. "Several" participants said the current benchmark rate was either not restrictive at all or only "mildly" so.

The divisions show that while the Fed resumed rate hikes last month for the first time in over three years, internal debate over further tightening remains unresolved. Most officials expect one additional hike before year-end, but said the timing and necessity of such a move would be determined after reviewing upcoming inflation and economic data.

The recent surge in long-term US Treasury yields also featured prominently in the discussions.

Some participants said the Treasury market was functioning smoothly despite the recent spike in yields, but added that the Fed needed to strengthen its strategy, communications and response tools in case market stress materialized.

At the same time, some participants said that even if market functioning were to deteriorate, the Fed's intervention in the Treasury market should remain limited in scope.

With US 10-year and 30-year Treasury yields having climbed to their highest levels in 24 years, market attention has shifted beyond the Fed's benchmark rate to the trajectory of long-term yields. Even if the Fed holds rates steady this month, persistently elevated long-term yields could keep financial conditions tight for households and businesses.