Many officials viewed the rate hike as a preventive move to guard against sticky inflation.

The Federal Reserve released the minutes of its September policy meeting at 2 a.m. Beijing time on Thursday.

The minutes show that Fed officials were divided over how to characterize the rate increase: some saw it mainly as a preventive step, while others viewed it as a shift toward significantly tighter monetary policy aimed at curbing investment and consumer spending.

Most Fed officials believed another rate hike is likely needed this year.

Although the market expects the Fed to hold steady this month, some members' concerns about prices mean the vote could produce multiple dissents.

Inflation Concerns

Last month, all 12 voting members of the Fed unanimously agreed to raise the benchmark rate to a range of 3.75% to 4.00%, marking the Fed's first rate hike since July 2023.

But officials supported the move for different reasons. The minutes stated: "Many participants emphasized that, from a risk-management perspective, it was prudent to keep the policy rate in a higher range. Should demand prove stronger than expected or a new negative supply shock occur, this could serve as insurance against inflation remaining persistently above target."

At the same time, other members believed the September rate increase was crucial to prevent recent energy shocks and other price shocks from spilling over into broader prices. A few members supported the hike on the grounds that their estimates of the neutral rate had already risen.

The Fed staff's inflation projections for 2026 to 2028 in its economic outlook were revised upward compared with the June version.

Staff now expect inflation to gradually decline over the next two years, only finally reaching the 2% inflation target in 2029.

The minutes noted that Fed officials believed inflation remains elevated and that little progress has been made toward the 2% target in recent months.

U.S.-Iran tensions and the artificial intelligence-related investment boom are pushing up inflationary pressures; the labor market has strengthened slightly, and the U.S. economy continues to expand at a steady pace.

"Several participants said the current policy rate is not yet restrictive, or is only mildly restrictive. Most participants assessed that another increase in the target range for the federal funds rate would likely be needed by the end of the year."

Officials judged that the September rate hike would speed up the disinflation process.

The minutes stated: "Participants believed that this rate increase would help inflation return to the Fed's 2% target in a more timely manner."

Policy Outlook

After the September meeting concluded, investors initially expected the Fed to raise rates consecutively, but market bets have since continued to cool.

Current market expectations are that the Fed will keep the policy rate unchanged in the 3.75% to 4.00% range this month (ahead of the midterm elections) and raise rates again at its December meeting.

After employment and inflation data came in below expectations, recent comments from Fed officials further reinforced the market's view: policymakers will leave some time to observe whether core inflation can fall from its current level of more than 1 percentage point above target, or whether it proves more sticky than expected.

Members' differing assessments of the current economic situation point to a heated debate at the Oct. 27-28 policy meeting: whether inflation has already evolved into broader demand-driven inflation that requires the Fed to take further immediate action.

The alternative is to hold off on raising rates and wait for subsequent data to verify whether price shocks such as energy and tariffs fade and whether inflation can move back toward the central bank's 2% target.

This month's policy meeting could see divisions, and even multiple dissenting votes.

Derivatives market pricing shows that if the energy inflation threat persists, traders expect three more 25 basis point hikes by June next year, lifting rates to a range of 4.5% to 4.75%.

The U.S. government will release the key inflation gauge PCE next week, and the data may shift market expectations.

Bob Schwartz, a senior economist at Oxford Economics, said in an interview with Yicai that given recent increases in the prices of refined products such as diesel, the upside risks to core inflation are steadily rising.

Revised data show that household fundamentals are stronger than previously thought, with consumer spending growing faster than earlier estimates.

Against the backdrop of this year's energy price shock, households still retain a larger savings buffer.

There are no signs of slowing in household consumption, and there is a risk that inflation proves more sticky than expected, which would further push the Fed to take another rate hike this year.

Deutsche Bank wrote in a research note that the urgency for the Fed to act at its October meeting has diminished somewhat.

However, inflation remains significantly above target, and without further monetary tightening, it seems difficult for inflation to fall back to the target range.

The bank's base case remains two more rate hikes on a quarterly pace, with the next increase coming at the December meeting.