The minutes of the Fed's September meeting will be released early Thursday morning Beijing time. It may be more weighty than usual, reflecting not only the 25 basis point hike in September, but also the metrics used by the Fed to gauge the degree of policy easing and how many more hikes are needed in the future.
Author: Jin10 Data
The minutes of the Federal Reserve's September meeting will be released at 2 a.m. Beijing time this Thursday. This document may attract more attention than usual, because it will further reveal why the Fed raised rates by 25 basis points in September, and how officials actually judge how tight current monetary policy really is.
More critically, the minutes may reveal how many more rate hikes the Fed is still considering. At the press conference after the September decision, Fed Chair Kevin Warsh said it was hard for him to describe overall financial conditions as "restrictive."
That statement leaves an important question: if current policy has only removed "one dose" of accommodation, does that mean more rate hikes are still needed ahead?
What indicators is the Fed actually watching?
It is currently unclear which financial conditions indicators the Fed specifically uses to judge whether policy is tight enough, and it is also impossible to determine to what extent the recent rise in market interest rates has already offset previous accommodation.
The Chicago Fed National Financial Conditions Index shows that U.S. financial conditions have continued to ease since peaking in the fall of 2022. Although this indicator is not at its loosest level in historical terms, it is still on the looser side of its historical range.
Other indicators give similar signals. The option-adjusted spread on the ICE BofA U.S. High Yield Index remains narrow, and historically there have been only a few periods when it was lower than it is now.
Michael Kramer, founder of Mott Capital Management, wrote that if the Fed is indeed watching these indicators, then the current financial environment may still not be enough to be defined as clearly restrictive policy. This also explains why the September rate hike may be just the beginning, rather than a one-off policy adjustment.
Real interest rates remain significantly below 2006 levels
Inflation is also key to judging whether policy is tight enough.
The U.S. August personal consumption expenditures (PCE) data was released after the September meeting, so it will not appear in the information on which the meeting minutes are based. However, the report included the Bureau of Economic Analysis's annual revisions and retroactively adjusted data since 2021, providing new context for judging the current inflation environment.
The revised data show that in August, headline PCE rose 3.4% year over year and core PCE rose 3.0% year over year, both unchanged from July. Except for a brief period in 2024 and 2025, headline PCE has never fallen below 2.5% since early 2021, let alone reached the Fed's 2% target.
This makes "whether further policy tightening is still needed" even more noteworthy.
The effective federal funds rate is currently about 3.9%. Measured by headline PCE, the real federal funds rate is only about 50 basis points; measured by core PCE, it is only about 90 basis points.
This level is markedly different from when Warsh first served as a Fed governor in 2006.
In mid-2006, U.S. headline PCE was rising about 3.3% to 3.5% year over year, roughly comparable to the current level. But at that time, the real federal funds rate was about 1.5% to 2.0%. By October 2006, as inflation eased, the real rate had risen further to 3.6%.
In other words, at a similar inflation level, the current real interest rate is still more than 300 basis points lower than it was in the middle of Warsh's 2006 term.
What might the meeting minutes reveal?
Therefore, Kramer believes that what is truly worth watching in the FOMC meeting minutes to be released this week may not be the already-clear decision to raise rates by 25 basis points in September, but how officials discuss financial conditions, real interest rates, and the pace of inflation decline.
The minutes may also reveal how quickly the Fed wants inflation to return to its 2% target, and whether officials believe current policy is already restrictive enough.
Of course, the meeting minutes may not provide a clear answer. They may be limited in length, focus on the discussion at the time of the September meeting, and may lack clear forward guidance.
But Kramer believes that if they can present Fed officials' discussion around the degree of policy accommodation, it could help the market judge whether the "one dose" of rate hikes in September is merely a one-off adjustment or the starting point of a new tightening cycle.