According to minutes of the Fed's September policy meeting released on Wednesday, most officials said last month that they expected one more rate hike. Some officials noted that how quickly inflation cools in the coming months will determine how long interest rates stay high.
The minutes read, "Most participants judged that one more rate increase would likely be appropriate at future meetings, while a few thought that an additional increase might not be necessary."
In September, to assess how the U.S. economy has coped with previous rate hikes, the Fed kept its key lending rate at a 22-year high. With inflation falling steadily over the past year and the job market gradually cooling, officials felt confident enough to keep rates on hold for now, the minutes showed.
There are persistent doubts about the impact of the Fed's 11 rate hikes since March 2022 on economic activity. Financial markets expect the Fed to pause again at its Oct. 31-Nov. 1 monetary policy meeting, with the last rate hike this year likely to come in December, depending on economic data over the next few months.
The central bank's latest economic forecasts also showed that most Fed officials expect fewer rate cuts next year, confirming investors' fears that rates could stay higher for longer. Some officials said last month that how long rates can stay on hold depends on the inflation trajectory.
According to the minutes, some officials said the trajectory of inflation would determine how long interest rates would remain high.
Bond market trend
Expectations that rates will stay high for longer have rattled bond markets, pushing Treasury yields higher and causing pain for investors who expect a rate cut sometime this year. The decline in the bond market adds to the financial burden on U.S. households and businesses because Treasurys are the benchmark against which debt is priced. That means higher yields lead to higher interest rates on everything from car loans to merger and acquisition costs.
Fed Chairman Jerome Powell has said the central bank needs to see "below-trend growth" to ensure inflation can reach the Fed's 2 percent inflation target. It is unclear how much the rise in yields will affect economic activity, but several Fed officials said in public remarks this week that it could mean less action.
Atlanta Fed President Eric Bostic said Tuesday that the U.S. central bank doesn't need to raise interest rates further. Dallas Fed President Logan said on Monday that the need for the Fed to raise its benchmark interest rate further may have diminished given the recent surge in long-term Treasury yields.
Wednesday's minutes noted that "the tightening of credit conditions faced by households and businesses was a source of economic headwinds that could weigh on economic activity, hiring and inflation."
If economic growth and the job market continue to cool, then the Fed may not raise rates again.
The economy added 336,000 jobs in September as the unemployment rate held steady at a low 3.8 percent, and some volatility in the energy market pushed up gasoline prices, leading to a pickup in headline inflation in August, though gasoline prices have eased in recent days. The Labor Department will release September's consumer price index on Thursday.
Balance upside and downside risks
The Fed's current decisions could inflict too much pain on the economy or not be enough to curb inflation. This means that officials must pay close attention to both downside and upside risks to inflation and economic activity so that the central bank can defeat inflation without causing a sharp rise in unemployment.
"All participants agreed that the Committee was able to proceed cautiously and that policy decisions at each meeting would continue to be based on the full information received and its implications for the economic outlook and the balance of risks," the minutes said.
Fed officials noted that the ongoing UAW strike was "a new source of uncertainty" and that its intensification posed both upside and downside risks to inflation and economic activity. They also said volatility risks in the energy market" Could undo some of the recent deflation." .
Credit conditions were likely to become tighter "if further strains were to occur in the domestic US banking sector", according to the minutes.
In addition to the numerous risks to the outlook for the economy and inflation, Fed officials last month discussed how government data could make it difficult to pass judgment on the economy. The minutes noted that "some participants saw it as challenging to assess economic conditions because some data remained volatile and were subject to large revisions."