Federal Reserve officials broadly supported the central bank’s September interest-rate increase, with minutes showing that most policymakers saw a case for another hike by the end of the year as they assessed persistent inflation risks.
The minutes of the Federal Open Market Committee’s September 15-16 meeting, released Wednesday, showed that officials had different reasons for supporting the quarter-point increase.
Some viewed higher rates as necessary to limit the impact of energy and other price shocks, while others were more concerned about emerging demand-driven inflation.
“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.
The FOMC unanimously raised its benchmark rate by 25 basis points to a range of 3.75% to 4% in September.
It was the first increase since July 2023 and came as officials saw signs of stronger economic momentum.
“Several participants commented that the underlying momentum in the economy appeared to have increased,” the minutes said.
Many policymakers also argued that another increase could provide insurance against inflation remaining above the Fed’s 2% target because of stronger-than-expected demand or additional supply shocks.
Markets scale back October hike bets
Despite the hawkish tone of the September minutes, expectations for an October rate increase have fallen sharply following more recent comments from Fed officials and weaker economic data.
Investors on Wednesday were pricing in roughly a 20% probability of a quarter-point increase at the Fed’s October 27-28 meeting, down from around 70% in the days following the September decision, according to federal funds futures.
Two-year Treasury yields, which are particularly sensitive to expectations for Fed policy, had fallen more than 10 basis points over the previous week to around 4.76%.
Fed Vice Chair Philip Jefferson and New York Fed President John Williams said last week that policymakers had time to assess the economy before deciding on another increase.
Their comments contributed to the pullback in expectations for an October hike.
The minutes also showed that several officials viewed the policy rate before the September increase as “not restrictive or only mildly restrictive.”
However, policymakers remain concerned about inflation.
Consumer price data due October 14 could influence the debate over whether another increase is needed this month.
Some officials who dissented in July in favour of a rate increase could potentially dissent again if the FOMC decides to leave rates unchanged in October.
Treasury yields and jobs remain in focus
The September meeting also included a discussion of financial conditions and the recent rise in longer-term Treasury yields.
Many officials said financial conditions remained supportive of economic growth, citing substantially higher equity prices and narrow corporate bond spreads.
Tom Graff, Chief Investment Officer at Facet, told ICD that the minutes provided further support for his view that the Fed should raise rates at its October meeting.
Graff said the minutes showed limited concern about Treasury market volatility and suggested the Fed was unlikely to respond to bond-market moves in the near term.
Expert view
The spike in long-term interest rates was also a topic of discussion. Based on some things he’s said during his press conferences, Kevin Warsh views movement in longer-term rates in part as the market doing some of the Fed’s tightening for them. It is hard to tell for sure from the minutes, but it doesn’t seem to us that there’s consensus about that. Based on the minutes there doesn’t seem to be great concern over Treasury market volatility, which in turn means there is little chance the Fed takes any action based on bond market activity in the near-term.
He noted that Treasury yields had risen amid higher oil prices and rising European yields, which he said reflected concerns over inflation and the potential for global rates contagion.
Graff added that volatility in the Treasury market may persist until there is greater stability.
The minutes described Treasury market functioning as “smooth,” but Graff said traders remained cautious. He expects investors to eventually look for opportunities in Treasury bonds, although he does not expect that to happen until the market shows signs of stability.
Graff also pointed to the labour market as a potential factor in the October decision.
“The labor market was described as ‘stable,’ but bear in mind this meeting occurred before the weaker September jobs report. It could be that when FOMC members get to the October meeting, there are more concerns over the labor market than was evident from these minutes.” Graff added.
The combination of persistent inflation, softer labour data and elevated Treasury yields is likely to shape the debate over the Fed’s next policy move, with policymakers facing competing arguments over whether to raise rates again or wait for more economic data.
This post Fed minutes reveal split over inflation risks and need for rate hikes may be modified as updates unfold
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