Federal Reserve rate hike expectations strengthen as U.S. inflation runs above forecasts

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Fed rate hike expectations strengthen

Highlights

October headline CPI rose 0.4% month on month versus 0.3% forecast, while core CPI increased 0.3% against 0.2% consensus, heightening December rate hike expectations.
Nearly 88% of traders anticipate a 25-basis-point rate hike at the Federal Reserve's Dec. 8 meeting as inflation exceeds the central bank's 2% target.
Fed officials, including Christopher Waller, suggest a larger December increase remains possible, and PGIM expects 100 basis points of cumulative hikes starting next month.

October inflation data sharpens December rate outlook

As reported by CNBC, October consumer inflation came in hotter than economists expected, with headline CPI rising 0.4% month on month against a 0.3% forecast in a Dow Jones survey. Core CPI, which strips out food and energy, increased 0.3%, above the 0.2% consensus estimate.

The stronger reading keeps inflation at the center of the Fed's policy debate ahead of the Dec. 8 meeting. Almost 88% of traders expect a further 25-basis-point increase next month, according to the CME FedWatch tool.

Earlier this year, the Federal Reserve had appeared more comfortable with the direction of the U.S. economy as inflation seemed to be easing and economists saw room for rate cuts. That view shifted after the central bank raised rates in September for the first time since 2023, adding 25 basis points as price pressures reemerged.

Officials and economists see room for more tightening

Fed officials are signaling growing concern that inflation remains too persistent after running above the central bank's 2% target for more than five years. Chicago Federal Reserve President Austan Goolsbee says the U.S. has a "real inflation issue" and describes recent readings as "borderline disturbing."

Fed Governor Christopher Waller says a strong inflation report could push him toward supporting a half-point increase in December, adding that option should remain on the table if core CPI is around 0.3%. Chester Liaw, G7 economist at OCBC Group Research, says the latest CPI print strengthens the near-term case for tighter policy, even if a 25-basis-point move remains sufficient for December.

Robert Sockin, chief U.S. economist at PGIM, says inflationary pressures could persist even after another increase. With the labor market still stable, he does not expect higher rates this year to derail significant portions of the U.S. economy, and he continues to expect the Fed to raise rates by 100 basis points in total, starting with a move in December and followed by quarterly increases.

We have previously detailed the S&P 500 drop amid hot inflation data and a break in the tech uptrend.

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