US inflation came in hotter than expected in October, prompting Federal Reserve Governor Christopher Waller to say policymakers should consider a 50-basis-point rate hike at their December meeting if price data remain elevated. Markets still viewed a quarter-point increase as the likeliest outcome, but the prospect of a larger move has entered rate expectations and could weigh on hopes for a year-end stock market rally.
October CPI exceeds forecasts
The Consumer Price Index rose 0.4% month over month on a seasonally adjusted basis, 0.1 percentage point above economists’ expectations, data from the Bureau of Labor Statistics showed. Core CPI, which excludes volatile food and energy prices, increased 0.3%, also 0.1 percentage point more than forecast.
The report did not include a year-over-year inflation rate. A government shutdown had prevented the Bureau of Labor Statistics from collecting the relevant data last October, leaving investors without that comparison as they assess the inflation trend. Further price and employment figures will help shape expectations for the Fed’s policy path.
Before the release, some investors had hoped for signs of easing price pressures that could reduce the chance of another rate increase at the year-end meeting. The higher-than-expected readings for both headline and core CPI challenged that view. The Federal Open Market Committee has raised the federal funds rate once this year, while markets had already been weighing the possibility of further increases.
Waller says 50 basis points should be discussed
Speaking at an event in London recently, Waller said he would favor a rate increase in December even if October inflation came in below economists’ forecasts. If the data were higher than expected, he said, policymakers should consider a larger move. In that case, a 50-basis-point increase should be part of the December meeting’s discussion, he said, adding that a 25-basis-point hike could undermine the Fed’s credibility.
Waller’s comments do not mean the FOMC has decided to raise rates by 50 basis points. He is one of the committee’s 12 voting members, and his position does not determine its final decision. He has, however, aligned with the committee’s consensus at most meetings this year, arguing for a rate cut only in January. Investors will watch for similar views from other policymakers and for data that could support a more hawkish stance.
Markets price in a larger move
After the CPI release, the CME FedWatch tool put the probability of a 25-basis-point increase in December at about 85%. The implied chance of a 50-basis-point hike rose to nearly 15%, from zero the previous day. FedWatch estimates probabilities from federal funds futures trading; its figures shift with market prices and are not a policy commitment from the Fed.
A quarter-point increase remains the dominant market expectation. But if more FOMC members support the option Waller raised, discussion of a 50-basis-point move could further affect risk-asset pricing. A larger increase would raise borrowing costs for consumers and businesses and could lead investors to trim risk exposure, making a year-end stock rally harder to sustain.
PCE inflation and jobs data ahead of December 9
Before the FOMC’s final meeting of the year, scheduled for December 9, investors will also be watching the October Personal Consumption Expenditures price index and the November employment report. The PCE index is the Fed’s preferred inflation gauge, and its reading, alongside CPI, will inform market expectations for the rate decision.
Until those figures are released, October’s CPI report and Waller’s remarks will remain central to the policy debate. The size of any rate move will depend on the committee’s assessment and incoming economic data. Futures pricing still favors a 25-basis-point increase, while a 50-basis-point move has become an alternative that markets are monitoring.