Hawkish FOMC Minutes Show All 19 Fed Officials Supported Rate Hike, "Most" Assess Another Hike "By Year End Is Appropriate"

The September FOMC minutes struck a distinctly hawkish tone, as all 19 Fed officials backed a rate hike in September, with many supporting the move to protect against the risk of intensifying inflation pressures. A separate group of officials said higher rates were necessary based on their outlook for the economy, signaling greater concern for elevated inflation, according to minutes of the Sept. 16 FOMC meeting released Wednesday. The Committee unanimously raised the fed funds rate 25bp to 3.75%-4.00% and signaled that further tightening is likely by year-end.

“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, and also said that “Several participants commented that the underlying momentum in the economy appeared to have increased."

Policymakers remain concerned that inflation is proving sticky. August headline PCE inflation was estimated at 3.8% and core PCE at 3.4%, with higher energy costs, geopolitical tensions, and AI-related investment contributing to price pressures. Participants generally viewed inflation risks as skewed to the upside.

The economy continues to show resilience. GDP growth remained solid, consumer spending held up, and business investment was supported by the ongoing AI buildout. Labor market conditions were viewed as close to full employment, with unemployment at 4.1%.

Several participants noted that AI is boosting both investment and productivity prospects but could also contribute to inflation through stronger demand, rising input costs, and increased financing needs. Market participants likewise cited AI-related borrowing as a factor pushing Treasury yields higher.

Overall, the Committee judged that stronger growth, elevated energy prices, and persistent inflation warranted a more restrictive policy stance, with most members expecting another rate increase before year-end.

Here are the key highlights from the Fed minutes:

• Participants generally emphasized inflation remained elevated while the job market appeared near full employment.
• Participants offered a range of views for why they supported a rate increase.
• Participants generally saw inflation risks skewed to the upside, with some seeing those risks becoming more skewed in recent months.
• Almost all participants saw inflation risks tilted to the upside, while job market risks were broadly balanced.
• Some participants saw AI buildout possibly causing aggregate demand to outpace supply over the medium term, putting upward pressure on inflation.
• The staff economic outlook was stronger than the one prepared for the July meeting.
• Many participants noted that despite the recent climb in long-term Treasury yields, financial conditions appeared supportive of economic growth.
• A few participants observed that the Treasury market had been functioning smoothly, but noted the importance of planning for market stress.
• Changes in real rates contributed to most of the net increase in longer-maturity Treasury yields.
• Nominal yields increased around 35 basis points across the 2- to 10-year segment of the yield curve. Part of the increase reflected the higher expected path of monetary policy and the strength of economic data. Market commentary pointed to geopolitical developments, uncertainty related to the US Treasury's announcement and implementation of the buyback program, and competition for capital from heavy private debt issuance to finance the development of AI infrastructure as also contributing to higher term premiums and Treasury yields

The FOMC was also increasingly vocal on the inflationary impacts of AI:

• "Several participants observed that the rate of price increases in the core goods category also remained elevated, as effects of the AI buildout appeared to increase while the effects of tariff increases waned"
• "Some participants commented that increased energy prices and the ongoing AI buildout were contributing to cost pressures faced by businesses, including higher costs for transportation and input materials."
• "Some participants commented that the AI buildout could cause aggregate demand to outpace aggregate supply over the medium term, putting upward pressure on inflation."
• "Some participants observed that strong demand for skilled workers in sectors related to the ongoing AI buildout had been driving strong wage gains for these workers"
• "Participants noted that the ongoing AI buildout was boosting business investment. Several participants commented that the scale and pace of the AI buildout had continued to surprise to the upside"

The record also revealed a discussion about financial conditions. Many officials commented that despite the recent rise in longer-term Treasury yields, “financial conditions appeared to be supportive of economic growth, with equity prices having risen substantially this year and spreads on corporate bonds having remained narrow.”

Some officials, including three who voted against the FOMC decision to hold steady in July, could dissent again in favor of another increase if the majority votes to leave rates unchanged at the October meeting.
“Several participants stated that they viewed the current policy rate as not restrictive or only mildly restrictive,” the minutes

Chairman Kevin Warsh told reporters following the Sept. 16 decision the move was aimed at removing a “dose of accommodation” as inflation remained stubbornly high. His comments fueled market bets for another increase in October.

The Fed also said that the joint U.S.–Japan intervention to support the yen in late July also directly contributed to dollar depreciation, given the yen's considerable weight in currency indexes. The manager noted that the Desk, acting purely as fiscal agent for the U.S. Treasury, intervened in the currency market using U.S. Treasury funds; the System Open Market Account portfolio was not involved.

The Fed's rate hike prompted criticism from President Trump, who blamed the rate increase on Warsh’s colleagues, whom he claimed were being “very political.” Since the meeting, however, a series of comments from key Fed officials have indicated the central bank may be in no rush to raise rates again.

Fed Vice Chair Philip Jefferson and New York Fed President John Williams said in separate speeches last week they believed the central bank has time to assess the economy before considering another rate increase. Investors promptly reeled in their expectations for a rate hike this month.

Investors are currently pricing in a roughly 20% chance of another quarter-point hike at the Fed’s Oct. 27-28 meeting, down from around 70% in the days following the September decision, based on federal funds futures. Yields on two-year Treasuries, seen as the most sensitive to Fed policy, dropped more than 10 basis points in the past week to near 4.8%.

Bloomberg notes that last week’s remarks by Williams and Jefferson don’t mean the Fed won’t adjust policy any further. Officials continue to warn that inflation is too high. The CPI report due Oct. 14 might yet revive calls for a near-term hike.