Fed Minutes Show Improved Economy, Rate Hike Likely by Year-End

A brighter read on the economy, with a hawkish edge

The Federal Reserve's most recent assessment of the U.S. economy was more upbeat than any it has given in a while. That good news is also why borrowing costs are likely to rise again. Minutes from the September 15–16 meeting of the Federal Open Market Committee came out on October 7. They describe a labor market near full employment, with some signs of getting stronger, and an economy growing at a solid pace. They also say inflation remains elevated.2 Almost all participants judged that the risks to the labor market had shrunk and were now broadly balanced, while the risks to inflation still pointed upward.214

That combination of better growth and stubborn prices is what pushed the Fed to change course. At the September meeting the committee voted 12-0 to raise the federal funds rate by a quarter point, to a range of 3.75% to 4%. It was the first increase since July 2023.19 The minutes now show that most officials expect to raise rates once more before the year ends. They do not say when.1112

What the September decision did

The Fed's other administered rates moved up with the target range. The interest paid on reserve balances went to 3.90%, and the primary credit rate at the discount window rose to 4.0%, both effective September 17.2 Daily Fed data from early October show the effective federal funds rate holding at 3.88%. The prime rate banks charge their best customers stands at 7%.17

Chair Kevin Warsh called the move removing "a dose of accommodation," not tightening. He also declined to say whether it was the first of several increases or a one-time step.912 He did not soften the reason behind it: he said inflation is simply too high and has been for too long.9 Analysts at MUFG thought his press conference sounded more hawkish than the statement itself. They noted that he waved off the Fed's own projection that inflation would not reach 2% until 2029, calling that too slow.7

The quarterly projections released alongside the decision point the same way. The median official now expects the funds rate to end 2026 at 4.1%. Sixteen of 18 participants expect at least one more increase this year, and four expect two.48 The committee also nudged up its growth forecast for 2026 to 2.3%, cut its unemployment projection to 4.1%, and raised its 2026 inflation forecasts to 3.7% headline and 3.4% core.23 In other words, the Fed expects a stronger economy and higher inflation at the same time, so it plans to keep rates higher.

Why the economy looks better to the Fed

Recent speeches by Fed officials add detail to the minutes. In an October 1 speech, Vice Chair Philip Jefferson said GDP grew at a 2.4% annualized pace in the first half of the year. He credited strong business investment, much of it tied to artificial intelligence, and consumer spending that held up despite higher energy and tariff-related prices.25 He said unemployment had moved sideways this year and dipped to 4.1% in August, a level he considers close to maximum employment. He added that job vacancies once again outnumber unemployed workers.25

Governor Christopher Waller explained why he switched from cutting rates in late 2025 to raising them now. Last year's cuts, he said, were insurance against a weakening job market while inflation was close to target. During 2026 the labor market settled down, but progress on inflation stalled.30 He named three forces: the Middle East conflict keeping oil prices high, the AI buildout pushing up high-tech consumer prices, and trade disputes threatening new tariffs. A hot August inflation reading just before the September meeting settled the question for him.30 Because economic activity looks stronger in the second half, he said he is not very worried that tighter policy will cause a damaging slowdown.30

The minutes reflect the same concerns. A couple of participants worried that price increases from energy disruptions and AI-related demand could spread into broader, more lasting inflation.214 Several said the current rate is not restrictive, or only mildly so. That is a strong hint that they see room for more increases.211

Where the coverage diverges: the data since September

The main disagreement in the coverage is about how current the Fed's upbeat view still is. The minutes describe a meeting held three weeks before they were published, and the data have weakened since then.

September payrolls rose by only 29,000, against expectations of about 90,000. July and August were revised down by a combined 60,000, and unemployment ticked up to 4.2%.19 August PCE inflation, the Fed's preferred measure, came in at 3.4% headline and 3.0% core, below the forecasts of roughly 3.7% and 3.3%.1912 Part of that drop came from the Commerce Department's annual methodology revisions, not from a real slowdown. One analysis argued that the revisions lowered the level of recent inflation without changing its trend.28 The minutes themselves show that Fed staff estimated August inflation at 3.8% headline and 3.4% core under the old methods.11

Commentators read these numbers differently. US News described the minutes' view of the economy as mostly cheerful.14 AdvisorHub, by contrast, pointed to a labor market showing signs of weakening.15 Waller took a middle position. He said the September jobs report still showed a solid, stable labor market, and that payroll gains were around the breakeven pace needed to keep unemployment steady.30 On balance the Fed's leadership treats the soft data as a reason to wait, not a reason to change direction. Waller said plainly that policy will focus on the inflation side of the mandate for at least the near term.30

Markets move the next hike to December

Market pricing has shifted quickly. Right after the September increase, investors put about a 51% chance on another hike at the October 28 meeting.20 After the softer PCE report and the weak jobs numbers, futures-implied odds fell from about 70% to roughly 20%, and later to around 16–18%.1916 Investors now put the odds of a hike by the December 9 meeting at about 75–85%.1620 Reuters and the Wall Street Journal both reported that the minutes showed no clear urgency for an October move.11

The Fed's own signals support that timing. Waller said further increases do not have to come at back-to-back meetings, as long as they happen within a reasonable period. He also noted that markets see nearly an 80% chance of at least two hikes by the March 2027 meeting.30 Some officials want more. Dallas Fed President Lorie Logan has said rates may need to rise another 50 basis points or more, while Governor Michelle Bowman sees little need for further moves this year.19

The bond market is already tightening

One important factor sits outside the Fed's direct control. Long-term Treasury yields have climbed to levels not seen since 2002, with the 10-year reaching 5.35%.1412 That raises mortgage rates and other borrowing costs, which tightens financial conditions without any further Fed action.11 The minutes record a few participants urging the Fed to prepare its strategy, communications and tools in case of Treasury-market stress.11 Jefferson observed that yields across maturities have kept rising since the September meeting, and said policymakers may need more time to reach their own judgment.25

Higher yields have not settled the debate. The New York Fed's latest survey put one-year consumer inflation expectations at 3.9%, the highest since May 2023.1226 In the minutes, several participants flagged elevated short-term inflation expectations, even though longer-term measures remain consistent with 2%.2 If expectations keep rising, the Fed is more likely to act.

The bottom line

The conclusion here is that the Fed's improved view of the economy has become its main reason to raise rates. With growth solid, unemployment low and the labor-market risks it worried about last year largely gone, officials have more room to concentrate on inflation, which has been above target for more than five years.2512 The weak September jobs report and the softer revised inflation figures will probably delay the next increase, but they are unlikely to stop it.

The next tests come quickly. The September CPI report and the Fed's Beige Book survey of regional conditions are both due October 14.2627 The October 28 decision also falls about a week before the November 3 midterm elections, which some analysts see as another reason to wait.16 There is a political side as well: the September hike put Warsh at odds with the Trump administration's push for lower borrowing costs.9 Unless the October data surprise sharply in either direction, a hold in late October followed by a quarter-point increase in December is the most likely path. The new projections in December will show whether officials still expect rates to stay at that level through 2027.416