Fed minutes show officials divided, most expect another hike before year end

Minutes from the Federal Reserve's September 15 and 16 meeting, released Wednesday, show a central bank divided on how much more tightening the economy needs and leaning toward one more rate hike before the year ends.

Most participants judged that another increase in the target range would likely be appropriate by year end, the minutes said. Several viewed the current rate as not restrictive or only mildly restrictive. A couple framed their support for September's quarter point hike, which lifted the range to 3.75 to 4 percent, as matching a higher estimate of the neutral rate, while others saw it as needed to keep energy and other shocks from broadening into prices. But officials stressed that another hike was not a foregone conclusion and said they were approaching each meeting with an open mind.

Markets read the minutes as a sign the Fed is in no hurry to move again in October. The odds of an October hike fell to 17.2 percent Wednesday afternoon from 19.9 percent the day before, according to the CME FedWatch tool. Investors now expect the Fed to hold at its meeting later this month and hike again at the December 8 and 9 gathering. Two year Treasury yields fell on the news while 10 year and 30 year yields were largely flat. The S&P 500, which had been down on the session, trimmed its loss to 0.2 percent and closed near 7,801.

The minutes also revealed some officials want the Fed to start planning for bond market stress, noting the importance of strengthening the central bank's strategy, communications and tools for addressing market dysfunction. Staff economists raised their inflation forecast for 2026 through 2028 from the July outlook and now see inflation reaching the 2 percent target in 2029. Core PCE inflation hit 3 percent in August with headline inflation at 3.4 percent, both well above target. Officials cited the war with Iran and surging AI related investment as forces boosting price pressures, alongside a labor market that has strengthened a bit and an economy expanding at a solid pace.

The read is straightforward: the Fed is trying to finish the job on inflation without tipping the economy over, and the minutes show it is not confident it can do both. Chair Kevin Warsh struck a hawkish tone at the September press conference, but since then a softer jobs report and cooler than expected inflation data have taken October off the table in traders' minds. Thursday morning's consumer price report is the next test.