Fed officials open door to a half-percentage-point rate hike as inflation worsens

The US Federal Reserve hinted at a potential half-percentage-point interest rate hike at its upcoming December meeting, as inflation data released on Tuesday indicated prices were rising more rapidly than expected. While the overall Consumer Price Index rose only 0.4% month-over-month in October, excluding volatile food and energy prices, the core index climbed 0.3% for the third consecutive month, signaling persistent core inflation and potential spillover effects throughout the economy.

Fed Governor Christopher Waller suggested that a core inflation reading of 0.3% would warrant a half-point rate increase at the December 8-9 meeting. Market participants were already pricing in a quarter-point hike, with bets on a larger increase pushing near 15% by mid-morning. Waller emphasized that failing to take a stronger policy stance could undermine the Fed's credibility in fighting inflation, given the high and widening core inflation rates.

Dallas Fed President Lorie Logan echoed the sentiment, stating that a more aggressive rate hike may be necessary to combat the widening inflation trend. The October data came amid midterm elections focused on cost-of-living issues, with unexpected increases in auto insurance, public transportation, and medical services potentially burdening middle- and lower-income households.

Inflation concerns loomed large following the election results. Economists had anticipated a slower drop in core monthly inflation to 0.2% in October, but the actual reading surpassed expectations. The data set the stage for the Fed to consider a more restrictive policy stance, aiming to balance maximum employment with stable prices, as the current policy rate range of 3.75% to 4% appeared insufficient to curb inflationary pressures.