Fed minutes suggest a year-end rate increase and leave October or December open

Minutes released Wednesday from the Federal Reserve's September 15-16 meeting show most officials expected another federal funds rate increase before year-end, but left the exact timing to incoming data.

The federal funds rate is the rate at which depository institutions lend reserve balances to each other overnight.

October 27-28 and December 8-9 are the only remaining meetings this year.

Before the minutes, CME FedWatch showed about a 20% chance of an October increase and about a 91% chance that the rate would be higher by the December meeting. A week earlier the the chance of an October rate increase chance had been about 51%.

On September 30, the Bureau of Economic Analysis published the August personal consumption expenditures price index, or PCE. Prices were 3.4% higher than a year earlier, and 3.0% higher excluding food and energy, substantially exceeding the Federal Reserve's 2% inflation target. However, at the meeting, the staff had estimated those two figures at 3.8% and 3.4%, so the actual figures still came in below projections.

On Thursday, October 1, Vice Chair Philip Jefferson said he had supported the September increase. Any further move should depend on the data, the outlook, and the balance of risks, he said. Yields had risen further since the meeting, "a sign that investors are reassessing the evolving macroeconomic landscape."

"My colleagues and I will need to come to our own judgment, which may take more time."

On Friday, October 2, the Bureau of Labor Statistics said payroll employment rose by 29,000 in September and that unemployment was 4.2%. The bureau said both changed little. That gain followed an average monthly increase of 45,000 over the prior 12 months, and July and August combined were revised 60,000 lower than previously reported.

At the meeting, officials had called the job market stable and close to the Fed's goal of maximum employment. A majority had seen some recent strengthening, and they generally saw the risks to jobs as balanced.

The September meeting

On September 16, the committee raised the federal funds rate by a quarter of a percentage point, to a range of 3.75% to 4%. Nineteen officials take part in the meeting, and 12 of them vote. Every participant supported the increase, and the 12 who vote approved it with no dissents.

"With regard to the outlook for monetary policy beyond the current meeting, most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end."

Projections released with the decision had already put the median midpoint of the federal funds rate at 4.1% at the end of 2026. That reported figure lines up with one more quarter-point increase, to a range of 4% to 4.25%.

The median is 4.1% again at the end of 2027, so the middle forecast has no rate cut next year. Of the 18 officials who submitted forecasts, 12 had the rate one quarter point higher by the end of this year, four had it high enough for two increases, and two left it unchanged.

Participants said inflation remained elevated, and that they had not seen enough progress bringing it down in recent months. The staff tied part of its higher August estimate to energy. Officials also pointed to geopolitical developments that had lifted crude oil and refined fuel, and to surging investment in artificial intelligence.

Longer-term expectations, in markets and in surveys, still looked consistent with the 2% goal. Officials generally saw the risks to inflation as tilted upward. Some said that tilt had increased.

Yields on Treasury notes maturing in two to 10 years had already risen around 35 basis points, or 0.35 percentage point, by the meeting. Mortgage rates had risen a little more than the 10-year yield.

Credit was not the same for every borrower. Larger companies, and state and local governments, could still borrow fairly easily, while mortgage borrowers and small businesses faced somewhat tighter credit. At the same time, many officials called financial conditions supportive of growth, because stock prices had risen and the gap between company-bond yields and Treasury yields had stayed narrow. Jefferson came back to yields on October 1, after they had risen further.

The meeting on October 27 and 28 comes before the next PCE report, scheduled for October 29, and before the October jobs report, scheduled for November 6. December 8 and 9 is the last meeting scheduled this year.