Investors were pricing in a roughly 20% chance of another quarter-point Federal Reserve rate increase at the October 27-28 meeting. That was down from around 70% in the days after the Fed’s September decision, even though most policymakers saw a further rise by year end as likely to be appropriate.
The gap reflects the question confronting officials after their September 15-16 meeting: whether higher costs from energy, artificial intelligence investment and other shocks will remain confined to particular sectors, or spread into broader and more persistent inflation.
All 19 Federal Reserve officials gathered amid elevated inflation concerns and unanimously approved the first interest-rate increase in three years. The Federal Open Market Committee lifted its benchmark target range by a quarter-percentage point to 3.75% to 4%.
Officials were especially concerned about the duration of higher energy prices. Many said that the longer those prices remained high, the greater the chance that costs in some sectors would feed into wider price pressures. A couple of participants said a higher policy rate could stop price increases linked to energy disruptions and AI-related demand from broadening into more durable inflation.
Chairman Kevin Warsh told reporters after the September 16 decision that the move was intended to remove a “dose of accommodation” while inflation remained stubbornly high. Many officials backed the increase as protection against intensifying inflation pressures.
The case for further tightening rested partly on the strength officials saw in the economy. Several said the scale and pace of the AI buildout had continued to surprise to the upside. They saw AI lifting investment and wages in some sectors, with possible productivity gains in the years ahead.
Several officials also said underlying economic momentum appeared to have increased, while others judged interest rates to be either non-restrictive or only mildly restrictive. Many said financial conditions still appeared supportive of growth despite the recent rise in longer-term Treasury yields, pointing to substantially higher equity prices this year and narrow corporate-bond spreads.
Most participants thought another increase in the federal funds target range would probably be appropriate by year end. Of 18 officials who submitted forecasts, 16 pencilled in at least one further increase in 2026.
There were also calls to wait for more evidence. New York Fed president John Williams said there was no need for urgency. Fed vice chair Philip Jefferson said policymakers might need more time to decide whether another increase was necessary.
President Donald Trump criticised the rate increase and blamed Warsh’s colleagues, saying they were being “very political.”
Comments (0)