WRAPUP 5-Fed officials open door to a quicker round of rate hikes as inflation worsens

The odds that the Federal Reserve may raise interest rates by half a percentage point next month jumped on Tuesday after US data showed prices rising faster than expected in October and policymakers opened the door to a quicker pace of rate hikes. The Consumer Price Index rose 0.4% on a monthly basis in October, down from the 0.6% registered in September as energy inflation ‌receded. The core index excluding volatile food and energy prices, however, rose 0.3% for the third month in a row, evidence of persistent underlying inflation and price pressures spreading through the economy.

A few hours before the data was released, Fed Governor Christopher Waller said he planned to support a quarter-point increase at the Fed's December 8-9 meeting unless core CPI came in at 0.3% or more. "In that case, I believe a 50-basis-point hike in the policy rate should be considered at the December meeting," he said at a conference in London hosted by King's Business School and the Money Macro and ‌Finance Society.

Sticking with a smaller rate increase, Waller said, risked hurting the Fed's inflation-fighting credibility, given inflation was too high and appeared to be broadening. Economists polled by Reuters had expected core monthly inflation to drop to 0.2% in October. The CPI data and Waller's comments drove ‌a powerful selloff in the US Treasury market, with the yield on 2-year notes — a proxy for Fed policy expectations — rising by the most since early April 2025.

By mid-morning, market pricing reflected about a 15% chance of a half-point rate hike before retreating to about 10% in the late afternoon. Over the course of the day, traders also piled into bets the Fed would keep to its usual quarter-point rate hikes but deliver three of them by mid-2027, rather than two as seen before the data. MORE RAPID MOVE POSSIBLE

Dallas Fed President Lorie Logan said in separate remarks at an energy conference that it "may be possible to move more rapidly" than the pace implied by the quarter-percentage-point hike approved in September ⁠followed by a ​hold at the following meeting, in October. Logan said she feels the Fed ⁠needs to raise rates by at least half a percentage point more before pausing to take stock. "The goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices," Logan said, noting that the current 3.75%-4.00% policy rate was too low and "adding to inflationary pressures."

Kansas City Fed President Jeffrey Schmid, who ⁠hosted the conference with Logan, said inflation is "top of mind" for him and that he too believes the central bank's policy rate is "fairly accommodative." He asked attendees to think of themselves as Fed policymakers and to indicate whether they felt the Fed should cut, hold steady or raise rates in December; none picked a cut, ​and a large majority picked a hike. "Isn't that kind of interesting? And I think it's actually instructive," he said, adding that a big part of his job is to demystify what the Fed does, including how it makes rate-setting decisions.

ONGOING INFLATION RISKS The October ⁠inflation data followed US midterm elections last week that revolved around cost-of-living issues and ended in a rebuke of President Donald Trump and his Republican Party.

The October data showed unexpected jumps in the cost of auto insurance, public transportation and medical services, increases that could land particularly hard on middle- and lower-income households. Policymakers see those groups as the weak link ⁠in ​an overall solid consumer spending picture. "There was not much in today's report to assuage concerns about ongoing inflation risks or the fact that the Fed will need to hike rates further to tamp down price pressures," Omair Sharif, president of Inflation Insights, wrote after the release of the CPI data.

He said the data put the core Personal Consumption Expenditures Price Index on track to rise 0.34% in October, which would translate into a 4% annualized pace and represent an increase from the prior month. The Fed uses the PCE Price Index to measure progress toward its 2% ⁠inflation target, but it considers the core figure a better measure of inflation trends. Fed Vice Chair for Supervision Michelle Bowman said later on Tuesday that she too was worried about persistent inflation, but warned that tighter financial conditions from falling stock prices and higher bond yields ⁠posed potential risks to the economy.

She said she expected inflation to cool next ⁠year as long as price pressures from the AI buildout and the Middle East conflict abate, and did not sound in a hurry about rate hikes. "The trend is not on a downward trend for inflation, and I think that that should give us some pause as we think about the need to address inflation and at what pace and on what timeline," Bowman said in Washington at the Council on ‌Foreign Relations. "I would let my colleagues' statements speak for themselves, ‌but certainly I think I gave an indication today that I think addressing inflation is the right move for us."