Get ready for rate hike(s)
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Fed governor Christopher Waller. Photo: Prakash Singh/Bloomberg via Getty Images
The elevated inflation reading all but locks in a Fed interest rate hike in December.
- Now, the debate is shifting to whether the Fed should entertain a super-sized rate hike in December — and how much further the central bank may need to tighten policy in 2027.
State of play: Even the Federal Reserve officials who have argued for patience in getting inflation back under control are alarmed at the ongoing, broad-based price pressures of the sort evident in Tuesday's numbers.
- The two-year Treasury yield, which is sensitive to expectations of Fed policy, is up a stunning 0.20 percentage points this morning, indicating that traders see a rising chance the Fed will raise rates more than the one or two more times markets had expected.
- Treasury prices broadly fell, driving the yield on the 10-year Treasury note, a benchmark for mortgages and other loans, up above 5%.
The intrigue: Before the CPI release, governor Christopher Waller delivered a speech in which he raised the possibility of a super-sized rate hike, not the quarter-point move that is the norm when the Fed is on a non-emergency footing.
- "To recap my economic outlook, economic activity is strong, the labor market is stable, but inflation is too high," Waller said in London.
- "This means that even if, as I expect, the monthly rate of inflation improves in October, I am leaning toward supporting an increase in our policy rate of 25 basis points" at a policy meeting that concludes Dec. 9.
Yes, but: "That's my plan if things proceed as I expect," he continued — before saying that if the October CPI data turned out to be like the last couple of months, with core inflation at 0.3% or higher, "then a stronger policy move may be needed."
- "In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," Waller said. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."
Between the lines: That is exactly the report — with 0.3% core inflation — that arrived mere hours after Waller's comments.
- Add in two current voters on the Fed policy committee who dissented at the last meeting, instead favoring a hike (Lisa Cook and Beth Hammack), and other voters who have leaned hawkish lately (Michael Barr, Lorie Logan, Neel Kashkari), and there is a significant contingent that is worried the Fed's policy is incorrectly calibrated.
- The double whammy of Waller's comments and the inflation report drove market-based odds of a half-point rate hike in December to 14% this morning, per CME's FedWatch tool. Those chances were nil yesterday.
Of note: Logan, the president of the Dallas Fed, delivered a speech Tuesday post-CPI report in which she made clear she favors two more interest rate increases — and even seemed open to the extra-large rate hike Waller discussed.
- ""I currently estimate that the Fed funds target range is at least 50 basis points — half a percentage point — below the level that would create some modest restriction and begin to bring the inflation trend back to target," Logan said at an energy conference in Houston.
- "The exact pace of increases could depend on the near-term economic and financial environment. It may be possible to move more rapidly this winter than the FOMC has moved so far this fall," Logan said.
The bottom line: The tightening shall continue until morale (or at least core CPI inflation) improves.
