The Fed’s September Hike: One More Move, or a Pause?

The Fed unanimously increased its benchmark rate by 25 basis points in September, therefore bringing the target range to 3.75%-4.00%—its first rise since July 2023. Most officials concurred that although future choices would rely on new information—with no pressure to move in October—another increase this year might be suitable. Since then, markets have swung expectations toward December or no more hikes.

Officials noted inflation hazards weighted to the upside as they pointed to tariffs, geopolitical uncertainty, energy prices, firm core-goods costs, and AI-related expenditure that might increase demand and costs. They also said the economy was strong; consumer expenditure stayed stable; AI infrastructure helped corporate investment; and the labor market was virtually at full employment. Though Treasury yields were rising, strong equities and narrow credit spreads helped to sustain financial conditions.

The minutes show different justifications for the increase: some saw it as insurance against ongoing inflation; some saw it as defense against price shocks; and some thought the neutral interest rate had gone up. Many still thought policy was just somewhat limited. While the October 14 CPI report is a major test for the December view, markets now assign less than a 20% probability for an October rise. The minutes further verified that New York Fed served only as fiscal agent for a Treasury late-July yen intervention.