The U.S. Consumer Price Index (CPI) for October has surpassed market expectations, increasing the likelihood of a Federal Reserve interest rate hike in December. Senior Fed officials have emphasized the need for further tightening, with discussions of a significant 0.5 percentage point increase, referred to as a 'big step.'
According to the U.S. Bureau of Labor Statistics, the October CPI rose by 0.4% compared to the previous month, exceeding the market forecast of 0.3%. The core CPI, which excludes volatile food and energy prices, also increased by 0.3%, surpassing the expected 0.2%. However, due to a government shutdown last year, the year-over-year increase for this period could not be calculated.
Calls for a Big Step
With the CPI exceeding expectations, key Fed officials have reiterated the necessity for rate hikes. Christopher Waller, a Fed governor, advocated for a big step during a conference in London, stating, "If the core CPI continues to rise at 0.3% or higher, stronger policy measures may be needed. In that case, I believe we should consider a 0.5 percentage point increase at the December meeting." The core CPI increase reported aligns with Waller's conditions for considering a big step, the last of which occurred four years ago in December 2022.
Other Fed officials also supported the need for additional rate hikes. Lori Logan, president of the Dallas Federal Reserve Bank, stated at an energy conference in Houston that it is clear the Federal Open Market Committee (FOMC) should raise rates by 0.25 percentage points at least twice, emphasizing that excessive inflation cannot be tolerated.
Logan warned that rising energy prices, tariffs, and persistent inflationary pressures across the economy could lead to entrenched inflation if the rate of price increases remains above target for an extended period.
Jeffrey Schmidt, president of the Kansas City Fed, also remarked at the same event that current interest rates are "considerably accommodative," asserting that he did not view last year's rates as restrictive and underscoring the need for policy responses to curb inflation.
100% Probability of December Rate Hike
The hawkish comments from Fed officials, combined with higher-than-expected inflation data, have led financial markets to quickly adjust their expectations for rate hikes. According to the CME FedWatch Tool, as of 2:07 PM KST on November 11, the probability of a 0.25 percentage point increase in December is 88.8%, while the likelihood of a 0.5 percentage point hike stands at 11.2%. The market reflects a 100% probability of a December rate hike, with the previous day’s 17.2% chance of no change dropping to 0%. However, these probabilities may fluctuate in the future.
The bond market also experienced significant movement. The Wall Street Journal reported that the yield on two-year U.S. Treasury notes saw its largest daily increase in 19 months. The yield on ten-year notes surged to 5.021% during trading before closing at 4.982%, up 0.119 percentage points from the previous day’s 4.863%.
Despite the recent drop in international oil prices amid speculation about the end of the Iran conflict and concerns over debt issues among AI companies, there are cautious views regarding the Fed's potential for sustained aggressive rate hikes.
Michael Aron, chief investment strategist at State Street Global Advisors, noted that while the Fed could raise rates by 0.25 percentage points in December and January, further increases could be seen as a policy mistake. He highlighted that the recent decline in international oil prices, which surged due to U.S.-Iran tensions, could ease inflationary pressures if the two countries reach a peace agreement.
The Fed's final FOMC meeting of the year is scheduled for December 8-9.
* This article has been translated by AI.
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