A new American economy emerges from the Fed's September minutes

Editor's note: Liu Chunsheng is associate professor at the Beijing-based Central University of Finance and Economics.The article reflects the author's views and not necessarily those of CGTN.

On October 7, the US Federal Reserve released the minutes of its September 15-16 monetary policy meeting. The minutes' significance lies less in what the Federal Open Market Committee (FOMC) did—a unanimous 25-basis-point hike that lifted the federal funds target range to 3.75%-4.00%—a move the market had already absorbed; and more in terms of the signal they carried, with most participants judging that "further increases" in the target range before year-end "would likely be appropriate."

The most immediate impression from the minutes is that the US economy is more robust than expected. Participants broadly described activity as "expanding at a solid pace," underpinned by strong business investment and resilient consumer spending, with several even judging that the economy's "underlying momentum" had increased. Capital spending tells the story best: the four-quarter change in equipment and intangibles investment ran near 9%, the fastest since 2021, while S&P 500 profits grew roughly 20% over the past year with margins at historic highs. Consumption held firm too, real spending rose over 2% over four quarters, and the cleanest gauge of domestic demand, private domestic final purchases, advanced at nearly 3%.

Yet set against this revving growth engine is the eerie stillness of the labor market. Several participants noted that indicators such as hiring and layoff rates, job finding success, and long-term unemployment showed labor market "dynamism" remained unusually low.

This is the paradox of today's American jobs market—neither overheating nor collapsing, but "full employment with low fluidity." It shows up as low unemployment paired with low hiring. With aging demographics and slowing net immigration capping labor supply growth, monthly payroll gains are naturally small. For the Fed, this structure means the labor market is no longer something to "cool down" but a fragile asset to protect from harm. The case for hikes therefore rests almost entirely on the prices.

If employment lets the Fed exhale, inflation is its true anxiety. The minutes repeatedly stress that inflation "remained elevated" relative to the 2% target and that "insufficient progress" had been made in recent months. The data backs this up: PCE inflation at 3.7% year-over-year, and 4.1% on a six-month annualized basis, a target missed for more than five straight years.

More telling is the quiet shift in what is driving prices. For two years markets blamed inflation on supply shocks and tariffs, but the minutes reveal a telling change: several participants judged that "the effects of tariffs were diminishing" while "the influence of AI infrastructure buildout was strengthening."

This is a structural turning point. The dominant force behind inflation is migrating from exogenous trade shocks to a society-wide technological investment boom. The massive spending on AI data centers, chips, power and supporting infrastructure, described by officials as "exceeding expectations in scale and pace," is simultaneously fueling business investment and growth while also bidding up the prices of its own inputs. Geopolitics adds fuel: crude and refined product prices have been pushed higher, oil at one point breaking above $100 a barrel, compounding inflation expectations.

What truly unsettles policymakers, however, is not the current reading but inflation's self-reinforcing stickiness. Several participants judged the current policy rate to be "not restrictive," or only "mildly restrictive." In their eyes, today's rates may not be suppressing demand at all, and may even still be feeding inflation, leaving ample room for further tightening.

The pillars supporting the US economy and the risks buried within them are two sides of the same coin. The strongest pillar is the corporate sector: high profits, reduced regulatory constraints, tariff refunds, and the certainty of an AI investment cycle have together created a permissive credit environment, lending standards near historical easy levels and credit spreads near historic lows. Businesses barely feel the chill of monetary policy, which is precisely why officials worry policy is "not tight enough".

The risks have not vanished; they have merely relocated. The minutes touch on a subtle point: several officials see labor market dynamism as unusually low. This low fluidity looks harmless today, but it means the economy's resilience to shocks is eroding. On inflation, the convergence of AI investment and energy prices has made "upside risks" appear more frequently in the minutes, with some officials noting this upside tilt had "strengthened further in recent months." 

The broader challenge is that the AI capital spending and elevated earnings now propping up growth are themselves pro-cyclical and richly valued; once rates genuinely rise and financing costs climb, the sectors that benefited most from easy conditions are often the first to feel the strain.

From a policy standpoint, the path these minutes chart is clear. In the near term, as long as inflation fails to fall decisively while growth and employment hold up, another hike before year-end is the probable outcome, and markets have already repriced accordingly. Over the medium term, the Fed's real dilemma is that it must tame a structural inflation driven by AI investment and geopolitics without wounding the economic growth. For the US economy, the decisive question ahead is no longer "whether to hike," but whether this technology-fueled boom can prove it can withstand a higher interest-rate environment.