The key points
Minutes from the Federal Reserve’s September meeting confirmed there was little opposition to the decision to raise interest rates and broad agreement from “most” participants that another increase would follow by the end of the year.
“Some” participants thought inflation risks had become skewed to the upside in recent months while only a “few” participants thought the three-month measure of core-PCE inflation had shown material decline since the start of the year. This suggests no clear view on the inflation trend.
The “majority” of participants agreed the labour market had strengthened in recent months.
A majority agreed financial conditions remained supportive of growth.
The verdict
Fed policymakers were broadly in agreement on their diagnosis that another rate rise before the end of the year would be justified given the upside risks in inflation from energy prices and AI investments.
The Fed was unusually data-dependent going into the September meeting and we do not think that has changed much since. Weak recent job numbers and a more benign PCE reading for August firmed up our expectation that the Fed’s next move is most likely to come in December and not at the next meeting later this month. Today’s minutes support that view.
The details
Participants continued to note inflation remained elevated and progress on getting it down had not been sufficient in recent months. The Iran war had “pushed up prices for crude oil and refined fuel products”, the minutes said, adding that “surging AI-related investments were contributing to inflation pressures” as well.
There was disagreement on the path of underlying inflation. “Some” participants noted it had moved sideways in recent months, while a “few” thought it was declining. By contrast, “many” participants reported increased cost pressures.
Most of the Federal Open Market Committee noted the longer energy prices stayed elevated, the greater the risk of broader price pressures emerging, with some adding the AI build-out could cause excess demand and upward pressure on inflation.
Regarding growth, several participants commented that the underlying momentum in the economy had increased.
On September’s decision to raise rates, a majority emphasised that a higher path for the target range would be prudent on risk-management grounds, providing insurance against inflation remaining persistently above target because of stronger than expected demand or further adverse supply shocks.
On the future path of rates, “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end”.
