Every official at the Federal Reserve's September meeting wanted to raise interest rates, and most of them expect to do it again before the year is out. That much was expected. What the minutes of the meeting, released on Wednesday, add is a change in what the central bank thinks is driving prices up.
At the meeting on 15 and 16 September, all participants supported raising the target range for the federal funds rate by a quarter of a percentage point, to 3.75 to 4 per cent, according to the minutes. The formal vote among the twelve members was 12-0. It was the first increase since July 2023, according to the Federal Reserve's record of changes to the target range.
On what comes next, the minutes are direct. "With regard to the outlook for monetary policy beyond the current meeting, most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end," they say. The usual qualification followed: officials said they approached each meeting with an open mind and that decisions would depend on incoming information. The committee meets next on 27 and 28 October.
A different list of causes
Fed staff estimated that inflation as measured by the personal consumption expenditures price index rose to 3.8 per cent in August, with core inflation, which strips out energy and many food prices, at 3.4 per cent. Both were higher than a year earlier. The staff attributed that mostly to three things: the effects of past tariff increases, higher energy and input costs stemming from geopolitical developments, and an increase in prices of technology-related consumer goods associated with the AI buildout.
The third item is the new one, and officials returned to it repeatedly. Several said price increases for core goods remained elevated as the effects of the AI buildout appeared to grow while the effects of tariff increases waned. "Several participants commented that the scale and pace of the AI buildout had continued to surprise to the upside," the minutes say. Some went further, warning that the buildout could cause demand across the economy to outpace supply over the medium term, putting upward pressure on inflation.
The buildout shows up in the bond market too. Treasury yields rose about 35 basis points across two- to ten-year maturities between the July and September meetings, the minutes record. Part of that reflected the higher expected path of rates and strong data. But market commentary also pointed to competition for capital from heavy private borrowing to finance AI infrastructure as one of the forces pushing up term premiums. Yield spreads on hyperscaler debt used to finance AI infrastructure remained wide, the manager of the Fed's open market operations told the committee, given the volume of issuance and the long maturities of the bonds.
Energy was the other pressure. Many participants said the longer energy prices stayed high, the greater the risk that cost increases in particular sectors would spread into broader price pressures. Several noted that low- and moderate-income households were under strain, with higher energy prices weighing disproportionately on their incomes.
The tariff effect is fading
Tariffs, the dominant inflation story of 2025, are moving down the list, and research from the Federal Reserve Bank of New York published on Tuesday puts numbers on that.
Mary Amiti, Sebastian Heise and David E. Weinstein estimate that about a quarter of a tariff increase reaches consumer goods prices after a year. Prices of imported goods respond quickly, with the direct effect fully in place after about six months. Prices of goods made in the United States follow over six to twelve months, as producers pay more for imported parts and materials and raise their markups when competing imports cost more, they write.
By their estimate, tariffs had added 2.9 percentage points to consumer goods inflation by February 2026, and without them goods prices would have fallen slightly. That was the peak. They forecast the tariff contribution to inflation falling to around zero by August 2026. The tariff effect on the price level also eases, which they attribute to a cut in tariffs early in 2026, when a Supreme Court ruling ended the tariffs imposed under emergency powers and a lower 10 per cent surcharge replaced them. The contribution to inflation then turns negative as the large increases of 2025 drop out of the twelve-month comparison. The level of prices stays higher. "Taken together, the two panels show that tariffs have left consumer goods price levels higher, while their effect on inflation fades," the authors write.
Their estimates cover non-oil consumer goods only, and exclude services, which make up about two-thirds of the consumer basket.
Why a second increase is on the table
Put the two documents side by side and the logic of the minutes becomes clearer. If tariffs were the main source of inflation, a central bank could argue for waiting for their effect to wash out. That is not the argument the committee made. It cited energy and AI-related demand, neither of which has a scheduled end date, and an economy still growing at a solid pace with unemployment at 4.1 per cent in July and August.
Officials split on their reasons for raising rates. Many said a higher path would be prudent on risk-management grounds, as insurance against inflation staying above target. A number said a higher path was necessary based on their central forecasts. Several said they viewed the current rate as not restrictive, or only mildly so. Some voiced concern that, after more than five years of inflation above 2 per cent, high inflation could begin to affect expectations and wage- and price-setting decisions.
The staff forecast inflation returning to 2 per cent in 2029, and its forecast for 2026 through 2028 was somewhat higher than the one prepared for July.
Bond yields barely moved on the day. On Wednesday, when the minutes were released, the two-year Treasury yield slipped to 4.77 per cent from 4.79 per cent, while the 30-year yield rose to 5.67 per cent from 5.64 per cent, according to the Treasury Department's daily par yield curve rates. The September consumer price index is due on 14 October, according to the Bureau of Labor Statistics, two weeks before the committee meets again.
When the market was still pricing roughly even odds of a September increase, the debate was whether the Fed would move at all. The minutes suggest the debate has moved on. The question now is whether energy prices and spending on data centres keep pushing inflation up long enough to justify a second increase, and whether the committee acts in October or waits for its final meeting of the year.
The vote, the views of participants and staff, the inflation and unemployment figures, the market developments discussed and the date of the next meeting are from the minutes of the Federal Open Market Committee meeting of 15-16 September 2026, released by the Federal Reserve on 7 October 2026. The release date is from the Federal Reserve's announcement of the same day. The estimates of tariff pass-through and the tariff contribution to consumer goods inflation are from Mary Amiti, Sebastian Heise and David E. Weinstein, writing in the Federal Reserve Bank of New York's Liberty Street Economics on 6 October 2026. That the September increase was the first since July 2023 is from the Federal Reserve's published history of changes to the federal funds target range. Treasury yields on 6 and 7 October are from the Treasury Department's daily par yield curve rates. The release date of the September consumer price index is from the Bureau of Labor Statistics release schedule. The analysis is our own.
Topics marketsfederal reserveinterest ratesinflationtariffsenergy pricestreasury yields
