A Larger-Than-Normal Fed Rate Hike in December Now Looks More Likely. Here's Why.

The Federal Reserve's upcoming decision to hike interest rates has become increasingly likely in December, according to experts. After raising the federal funds rate by a quarter of a percentage point in September, the committee paused in October to assess whether inflation was starting to subside. However, the latest Consumer Price Index (CPI) data revealed that inflation remained higher than expected, with the overall price level increasing by 0.4% month-over-month, exceeding even the Fed's desired rate of 0.2%.

Factors contributing to this persistent inflation include higher energy costs due to the ongoing conflict with Iran and larger-than-expected price increases in housing and other sectors.

This unexpected inflation spike has led Fed Governor Christopher Waller to suggest that a half-point hike at the December meeting may be warranted. In a speech on November 10, Waller stated that if the core CPI rate, which excludes volatile food and fuel costs, came in at 0.3% or higher, a 50-basis-point hike should be considered. Indeed, core CPI in October was recorded at 0.3%, aligning with Waller's recommendation.

While it remains unclear whether Fed Chair Kevin Warsh agrees with this sentiment, his hawkish stance after the October meeting suggests he may be open to a larger increase. Wallsh's press conference following the October meeting indicated his preference for a more aggressive approach to combating inflation, even without the Fed having raised rates in October.

As a result, financial markets are now pricing in an 87% chance of a quarter-point hike and a 13% chance of a half-point hike during the December meeting. However, futures traders are expected to adjust their expectations in the coming weeks, as the upcoming Personal Consumption Expenditures price index report on November 25 will provide further insight into the health of the economy.