Most Fed officials expected another hike by year-end. Futures are pricing an October pause anyway

The Federal Reserve's own record of its September meeting reads more hawkish than the rate market does. Minutes released Wednesday afternoon show that every official at the table backed the September rate increase and that most of them expected to raise rates again before the end of the year. On the same afternoon, futures traders were assigning less than a one-in-five chance to a hike at the next meeting, October 27-28.

Both things can be true at once. The gap between them is about timing, and it is the part of the Fed debate markets will be trading for the next three weeks.

What the minutes say

At the September 15-16 meeting, the Federal Open Market Committee voted 12-0 to lift the federal funds target range by a quarter point to 3.75% to 4.00%. It was the first increase since July 2023, and the minutes record that "all participants supported" it. That is a shift from July, when three regional presidents, Beth Hammack of Cleveland, Neel Kashkari of Minneapolis and Lorie Logan of Dallas, dissented in favour of a hike the rest of the committee was not yet ready to make. The September meeting was Kevin Warsh's third as chair.

The line that drew the most attention concerns what comes next: "most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end." The minutes did not say when.

On the balance of risks, "almost all participants" judged that inflation risks were tilted to the upside while risks to the labour market had diminished and were broadly balanced, according to the excerpts published by TheStreet. Officials also said they "had not seen sufficient progress on lowering inflation in recent months." The Fed staff raised its inflation forecasts for 2026 through 2028 and now sees inflation returning to the 2% goal in 2029, the same summary noted.

Same vote, different reasons

The minutes also show the unanimous vote papered over a real difference in reasoning. Some participants saw higher rates as necessary to stop energy and other price shocks from feeding into broader inflation. Others were more concerned that inflation was being driven by demand. The distinction matters for what comes next. A hike meant to contain a supply shock can be paused once oil calms down. A hike aimed at demand tends to need follow-through.

Many participants also emphasized that a higher path for rates would be prudent on risk-management grounds, as insurance against inflation staying above target for longer.

The bond market backdrop in the record

The minutes include the New York Fed trading desk's account of markets between the July and September meetings. Nominal Treasury yields rose about 35 basis points across the two- to 10-year part of the curve over that stretch. Market commentary, the desk reported, pointed to geopolitical developments, uncertainty around the Treasury's buyback program and competition for capital from heavy private borrowing to fund artificial intelligence infrastructure as reasons investors demanded more compensation to hold longer-term bonds.

That last point lines up with what happened on Wednesday itself. The 10-year yield traded as high as 5.35% before a strong $39 billion auction pulled it back to around 5.29%. The pressure on long-term rates is coming from supply and term premium as much as from the Fed's next move.

Why futures still see an October pause

Rate futures have moved sharply in a short time. According to CME's FedWatch tool, the chance of an October hike was below 20% on Wednesday, down from 37.6% a week earlier, Reuters reported. Other trackers told a similar story from different starting points. One early-Wednesday FedWatch reading cited by Investing.com put the odds at 21.6%, against about 51% a week before. Invezz put them near 20%, down from around 70% in the days after the September decision.

Those readings moved on softer economic data and on comments from Fed officials since September, not on the minutes, which describe a meeting that took place three weeks ago. The minutes tell investors what officials were thinking then. Futures are a bet on what they will do with the data that has arrived since.

What to watch

The next major input is the September consumer price index, due October 14, two weeks before the Fed's October 27-28 meeting. A hot reading would test the market's pause assumption quickly, especially with most officials on record expecting one more increase this year. A soft one would make December, not October, the more likely window for the move the minutes describe.

In the meantime, the Treasury's 30-year bond auction on Thursday will show whether Wednesday's strong demand for 10-year notes extends to the longest maturities, the part of the curve the Fed's own record says is most sensitive to supply and term premium.