Stubborn inflation threatens longer Fed tightening campaign
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Inflation is no longer confined to a handful of trouble spots. Now, Federal Reserve officials are starting to question whether raising interest rates gradually will be enough to contain it.
Why it matters: Fed officials had hoped that a relatively modest series of interest rate hikes would be enough to bring inflation under control — more a recalibration than a tightening campaign.
- But stubbornly high — and increasingly widespread — price pressures are raising the possibility of a more prolonged tightening campaign, with no clear endpoint in sight.
- That would leave the Fed facing a more difficult balancing act: raising rates enough to contain inflation without unnecessarily damaging the economy.
What they're saying: "We have got a real inflation issue on our hands that has been developing — and we're going to have to deal with that," Chicago Fed president Austan Goolsbee, who called the inflation data "borderline disturbing," said late Tuesday.
Driving the news: Treasury yields are surging after Tuesday's hot inflation report and hawkish commentary from Fed officials — including governor Christopher Waller, who raised the prospect of a supersized rate hike next month.
- Short-term yields have risen more sharply than longer-term yields, a sign that investors expect the Fed may need to raise rates more aggressively than previously anticipated.
- The yield on the two-year Treasury note is still marching higher after surging 17 basis points on Tuesday, which was the biggest one-day surge since April 2025 — when markets were reeling from the "liberation day" tariffs.
- The yield on the 10-year Treasury note jumped about 8 basis points, putting it back above 5%.
- Financial markets see a December rate hike as virtually certain, according to CME FedWatch. Expectations for next year are trending higher, with traders now pricing in two additional quarter-point hikes by June.
The big picture: Measures designed to strip out unusually large price swings suggest that underlying inflation pressures are gaining pace.
- The Cleveland Fed's trimmed-mean Consumer Price Index —which filters out unusually large price swings to give a clearer picture of underlying inflation — rose 0.4% in October, the largest monthly increase since May.
- The Atlanta Fed's sticky-price CPI, which tracks prices that typically change, slowly accelerated to a 4.7% annualized pace in October, its fastest since February 2025.
- More than three-quarters of the consumer price basket saw prices rise at an annualized rate exceeding 2% in October, the largest share since August 2022, Charles Schwab's head of macro research Kevin Gordon posted on X.
Yes, but: The Fed may have reason to proceed cautiously even against the backdrop of stubborn inflation.
- Rising bond yields and a sell-off in technology stocks (revived again by the exit of Nvidia CEO Jensen Huang) are already tightening financial conditions — potentially doing some of the work of higher interest rates.
- Fed governor Michelle Bowman said in a speech that falling stock prices, higher borrowing costs and a stronger dollar could weigh on economic growth, particularly in sectors already struggling with high interest rates.
- Cleveland Fed president Beth Hammack, who dissented against the decision to hold rates steady last month, said she still supported a more gradual approach to raising rates. "It's less disruptive to the overall economy than moving in sharper, more aggressive movements," she said Thursday morning.
What to watch: Some of the forces driving inflation higher this year — including tariffs and the Iran war — were expected to be temporary. But the risk that they will prove more persistent keeps resurfacing.
- President Trump threatened on Thursday morning to double tariffs on Mexican imports unless the nation stops a caravan of migrants from reaching the U.S. border.
- Trump also said the U.S. doesn't need a deal with Iran, raising fresh questions about how soon the conflict (and the disruption to global energy supplies) might end.
