Fed Minutes Suggest That More Interest Rate Hikes Could Be Necessary to Calm Persistent Inflation

When interest rates are rising, the Federal Reserve is never far from investors' minds.

While corporate earnings are the primary long-term determinant of the stock market's performance, the macro environment counts for a lot, and few factors carry more weight than the Fed's interest rate movements.

New Fed Chair Kevin Warsh has promised to tame inflation, and last month, the Fed raised the benchmark Fed funds rate for the first time since 2023. It now sits at 3.75%-4% after the 25-basis-point hike.

As investors speculate about what the Fed's next moves will be, they got another hint from the minutes of the September meeting, released on Wednesday.

Image source: Federal Reserve.

What we learned from the Fed minutes

The minutes confirmed what many investors already believe: That the Fed will raise rates before the end of the year.

The notes said, "Most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end."

The central bankers did hedge that forecast, however, saying that they approach each meeting with an open mind, and that future decisions would be based on new information.

The vote to raise the Fed funds rate by 25 basis points was unanimous, as we already knew, and they noted generally solid growth in economic activity and that the unemployment rate remains low. The members believed that this rate hike and subsequent ones "would support a timelier return of inflation to the Committee's 2 percent goal."

The good news for investors

The Fed’s September minutes are now three weeks old, so they’re not as good an indicator as they would be if they were released immediately.

Shortly following the September hike, investors gave a 51% chance that the Fed would raise rates again at the next meeting on Oct. 28. However, the facts on the ground have changed. The personal consumption expenditures (PCE) index, the Fed’s favored inflation gauge, was cooler than expected in August, and the September jobs report showed almost no growth in the labor market.

After those two reports, the CME Fedwatch tool, which is based on Fed funds futures prices, puts the chance of a rate hike in October at just 18%.

However, investors shouldn't get too comfortable with where rates are today, as investors are now betting on a December rate hike, with a 80% chance that rates are at 4%-4.25% or higher after the December meeting.

What to watch now

The Fed is squarely focused on inflation, but there are signs that consumers are cutting back on discretionary spending, as even Walmart reported its worst comparable sales growth in six years in the second quarter.

We'll get a clearer sense of the Fed's future course of action from October's CPI report, the last major update before the October meeting.

Additionally, the war in Iran remains a major factor, as that's the primary reason why energy prices have spiked.

Looking ahead, investors believe the Fed will continue to hike rates into 2027, but we could see inflation for several reasons unrelated to the Fed, including a weakening labor market, soft consumer spending, or a drop in oil prices if the Strait of Hormuz fully reopens.

Incoming information can change quickly, meaning investors shouldn't be overconfident that rates will keep going higher.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.