Fed minutes show most officials favored another rate hike by year end

Most Federal Reserve officials viewed another interest rate increase as likely appropriate by year end, according to minutes of the September 15 and 16 meeting, as persistent inflation and resilient growth supported further tightening.

All participants backed September’s quarter percentage point increase, which lifted the federal funds target range to 3.75% to 4%. Officials generally judged that the labor market was near full employment while inflation risks remained tilted to the upside.

The minutes showed broad concern that inflation had made insufficient progress toward the Fed’s 2% target. Policymakers pointed to higher energy prices linked to geopolitical tensions and surging investment in AI infrastructure as sources of price pressure.

Some officials warned that the AI buildout could push demand above supply over the medium term. Business contacts also reported rising costs, and some participants said companies appeared increasingly able to pass those increases to consumers.

Fed staff estimated that annual headline PCE inflation reached 3.8% in August, while core inflation stood at 3.4%. Under a forthcoming change to the Bureau of Economic Analysis methodology, those estimates would be 3.6% and 3.2%, respectively.

Staff raised their inflation forecasts for 2026 through 2028 and projected a return to 2% in 2029. They also strengthened their growth outlook, citing robust business investment, solid consumer spending and supportive financial conditions.

Several officials viewed the policy rate as either not restrictive or only mildly restrictive. Many argued that a higher rate path would provide insurance against persistent inflation, while others considered further tightening necessary under their central economic outlook.

The AI investment boom also featured in discussions of bond markets. Treasury yields rose roughly 35 basis points across maturities from two to 10 years during the period between meetings. Market commentary cited heavy borrowing to finance AI infrastructure as one factor contributing to higher yields, alongside economic data and geopolitical developments.

Despite rising borrowing costs, many officials said financial conditions continued to support growth. Strong equity prices and narrow corporate credit spreads helped offset the increase in Treasury yields, although elevated mortgage rates continued to weigh on housing.

Officials emphasized that another hike was not predetermined. Future decisions would depend on incoming data and changes in the economic outlook and balance of risks. The next policy meeting is scheduled for October 27 and 28.