Federal Reserve meeting minutes for September showed that the central bank's policy-setting body took a hawkish and unified stance on the rate decision, even though the reasons for supporting a hike differed among officials.

According to the minutes of the Federal Open Market Committee (FOMC) meeting held September 15-16 released on Wednesday, all 19 senior Fed officials supported raising the target range for the federal funds rate by 25 basis points to 3.75%-4.00%. This was the Fed's first rate increase since July 2023.

The minutes showed that "most participants judged that it may be appropriate to further raise the target range for the federal funds rate before the end of the year," while participants also stressed that they remained open-minded about every meeting and that future policy decisions would depend on the latest information available at that time.

Nick Timiraos, a journalist known as the "new Fed wire," highlighted the content of the Fed minutes: "Regarding the outlook for monetary policy after the current meeting, most participants judged that it may be appropriate to raise the target range for the federal funds rate again before the end of this year."

After the meeting, employment data came in weaker than expected and several officials signaled that there was no need to rush to raise rates, leading markets to currently expect the Fed to more likely stay put at its October meeting and raise rates again in December.

According to the CME FedWatch tool, investors are now pricing in less than a 20% probability of a 25-basis-point rate hike at the Fed's October 27-28 meeting, down sharply from about 70% in the days after the September decision. The U.S. Consumer Price Index (CPI) due on October 14 could be an important data point shaping that expectation.

The two-year Treasury yield has fallen by more than 12 basis points over the past week and now stands near 4.78%. As one of the maturities most sensitive to Fed policy expectations, the pullback in the two-year yield reflects the market's view that the need for the Fed to tighten policy continuously in the near term is diminishing.

All 19 officials backed September hike, but reasons differed

At the September meeting, Fed officials reached a consensus on the need to raise rates, but the minutes showed clear differences over whether the hike was meant as "insurance" or as a response to broader inflation pressures.

"Many participants" viewed raising the target range as a risk-management consideration that could provide insurance against inflation remaining persistently above the 2% target, especially if demand proved stronger than expected or supply-side shocks emerged again.

At the same time, another group of officials believed a higher policy rate was necessary in itself to prevent recent shocks such as energy prices from spreading further into broader goods and services prices. A few officials also saw the hike as consistent with their judgment that the neutral rate level had risen.

The minutes also showed that some officials believed the policy rate before the September hike was not sufficiently restrictive. "Several participants" said the policy rate at that time was "not restrictive or only mildly restrictive."

This means that while all officials supported the September hike, there was no fully unified judgment that the Fed had entered a new phase requiring sustained and substantial monetary tightening.

Most officials expect another hike this year, but no clear urgency for October

On the next policy path, the minutes sent a hawkish-leaning message but did not suggest that an October hike had already become a foregone conclusion.

The minutes said that "most participants judged that it may be appropriate to further raise the target range for the federal funds rate before the end of the year." That implies that at the time of the September meeting, most officials still expected at least one more hike within the year.

However, officials also stressed that they would keep an "open mind" about each meeting and that future policy decisions would depend on incoming information.

That language was broadly in line with recent public remarks by Fed officials.

New York Fed President John Williams and Fed Vice Chair Philip Jefferson recently said the Fed has time to further assess the economic situation and does not need to rush into another rate hike. Their comments quickly drove markets to cut bets on an October increase.

In addition, a weaker-than-expected U.S. September employment report further reduced market expectations for a Fed hike this month. Investors now lean toward the view that the Fed will pause in October, wait for more inflation and employment data, and consider a second hike of the year in December.

Inflation still above target, while energy prices and AI investment add upside risks

Although the Fed believes inflation is gradually cooling, officials still lack sufficient confidence in the pace of disinflation.

The minutes showed that almost all participants saw inflation risks as tilted to the upside, and some officials believed that upside skew had strengthened in recent months. Officials noted that recent energy price increases, geopolitical risks and tariffs could all keep inflation above target for longer than expected.

The AI investment boom also became an important source of inflation risk discussed at the meeting.

Some officials argued that AI is boosting investment and improving the outlook for productivity, but it could also push inflation higher through stronger demand, rising input costs and increased financing needs. At the same time, strong demand for skilled labor in AI-related industries could also drive up wages in those roles.

The minutes said AI buildout is driving business investment, and its scale and pace "continue to exceed expectations."

In addition, some officials pointed out that core goods price increases remained relatively high. As the impact of AI buildout continues to expand, the resulting demand and cost pressures could offset some of the inflation relief from fading tariff effects.

U.S. economy remains resilient, financial conditions still support growth

The resilience of economic growth was also an important backdrop for the Fed's September decision to raise rates.

The minutes showed that several officials believed the underlying momentum of the U.S. economy had strengthened. Consumer spending remained resilient, business investment was supported by AI infrastructure construction, and the overall economy continued to expand at a relatively solid pace.

At the same time, the labor market was seen as close to full employment.

Financial conditions also did not constrain the economy strongly enough. Although long-term Treasury yields have risen notably recently, many officials believed financial conditions overall still supported economic growth, citing factors including sharp stock price gains this year and narrow corporate bond credit spreads.

The minutes showed that 2-year to 10-year Treasury yields rose by a cumulative roughly 35 basis points over the relevant period. Officials viewed changes in real rates as one of the main reasons for the rise in long-term Treasury yields.

Market participants also cited geopolitical developments, uncertainty over the U.S. Treasury's buyback program, and large volumes of private debt issuance to finance AI infrastructure as important factors pushing up term premiums and Treasury yields.

July joint intervention to support yen was a Treasury action, not Fed funds

The joint U.S.-Japan intervention in late July to support the yen was an action taken by the U.S. Treasury Department and did not use the Fed's own funds.

The minutes showed that the New York Fed carried out the intervention "solely in its capacity as fiscal agent for the U.S. Treasury," using Treasury funds. The Fed's System Open Market Account (SOMA) portfolio did not participate in the operation. That account holds the Fed's U.S. government securities and other securities.

The minutes did not disclose the exact timing or size of the intervention. U.S. Treasury Secretary Bessent said last month that the United States used only a "tiny" amount of funds in the operation and described the move as consistent with U.S. interests.

A weak yen has become an increasing concern for Japanese policymakers because it drives up import prices and household living costs. At the same time, Trump criticized the weak yen, arguing that it gives Japanese manufacturers an unfair trade advantage.

The late-July action was the first joint intervention by Tokyo and Washington in nearly 30 years to support the yen. According to Japan's Ministry of Finance, Japan spent a record 15.4 trillion yen (about $97.5 billion) on currency intervention in the month through August 26.

Japanese Finance Minister Katayama Satsuki and U.S. Treasury Secretary Bessent have both signaled that the two countries are willing to intervene again if necessary.