Fed May Pause Rate Hikes Before Inflation Hits 2%

Federal Reserve officials may stop raising interest rates before inflation reaches the central bank’s 2% target if price growth slows across the economy or employment and borrowing weaken, minutes from their September meeting showed.

The minutes, released Oct. 7, detailed the Fed’s unanimous decision to raise its benchmark interest rate to a range of 3.75% to 4%. Most participants expected another increase before the end of the year, but they cited different reasons.

Many officials viewed another hike as protection against inflation remaining high. Others considered consumer spending and business investment strong enough to require higher rates. The two groups would look for different evidence before supporting a pause.

A drop in gasoline prices alone would probably not change the Fed’s outlook. Lower fuel costs could reduce expenses for households and businesses, while strong demand could allow companies to raise prices in other areas. Officials focused on price increases in services outside housing, as well as spending on equipment and data centers linked to artificial intelligence.

Repeated reports of slower price increases across goods and services would give officials more reason to wait. They would also look for evidence that businesses were losing the ability or need to pass higher costs on to customers.

The minutes noted that a planned revision to the inflation calculation would reduce the contribution of software prices and investment-management fees to the reported rate. Officials would distinguish between lower inflation caused by improved measurement and lower inflation caused by businesses raising prices more slowly.

Inflation expectations remained anchored around the Fed’s 2% goal over time. Officials worried that several more years of above-target inflation could lead workers to seek larger wage increases and businesses to plan further price increases. Slower price growth combined with stable expectations would reduce the need for a precautionary hike.

The labor market could also affect the decision. Officials did not need to see a sharp rise in unemployment before reconsidering another increase. Participants generally viewed employment as steady in September, with relatively few people out of work, giving the Fed room to focus on inflation.

Some participants considered wage growth consistent with inflation returning to 2% and viewed the labor market as a limited source of price pressure. Others noted that hiring and layoffs were both unusually low. Weak hiring could make it harder for unemployed people to find work, even if the unemployment rate remained stable.

Several reports showing weaker hiring or broader layoffs would make another rate increase harder to justify. Officials would likely place more weight on a pattern across multiple reports than on one weak figure that could be revised or reflect temporary conditions.

Participants also disagreed over how much existing interest rates were slowing borrowing and spending. Some noted that companies with large cash reserves could still finance projects, artificial intelligence investment remained strong and rising stock prices supported spending by wealthier households. Other evidence included expensive mortgages and financial pressure on lower-income households.

Officials considered whether the economy’s neutral interest rate-the level that neither stimulates nor restricts activity-was higher than previously estimated. Two participants had raised their estimates, indicating that a higher rate might be needed to slow the economy.

More cautious lending, weaker spending and reduced investment would provide evidence that current borrowing costs were slowing activity. Longer-term borrowing rates could also rise without another increase in the Fed’s short-term rate, although the rates do not always move together.

The Fed’s next scheduled meeting is Oct. 27-28. Holding rates steady would not promise an immediate cut or restore lower borrowing costs.