Traders raise odds of 50 bps Fed rate hike as CPI rise exceeds expectations

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The US Consumer Price Index climbed 0.4% on a monthly basis in October, a drop from the 0.6% in September, as energy inflation slid. But the core inflation, the index excluding volatile food and energy prices, climbed 0.3% for the third straight month, showing strong basis of inflation spreading across the economy.

In remarks delivered overnight in London, Federal Reserve Governor Christopher Waller indicated that a 0.3% increase in core inflation for October could lead him to consider a larger, 50-basis-point interest rate hike at the Fed's December 8-9 policy meeting. Although markets had largely priced in a 25-basis-point increase, expectations of a bigger move were gaining traction amid a widespread bond market selloff, with the probability rising to nearly 15% by midmorning.

Waller said that if core consumer prices climb 0.3% or more from September, the central bank may need to take stronger action. Speaking at an event organised by King's Business School and the Money Macro & Finance Society, he said a half-percentage-point rate increase should be considered under such circumstances.

He cautioned that opting for a smaller hike could undermine the Fed's credibility in tackling inflation, particularly as price pressures remain elevated and appear to be spreading across the economy. Economists had forecast core inflation to ease to 0.2% month-on-month in October.

The inflation figures, coupled with Waller's hawkish remarks, triggered a sharp selloff in US Treasury bonds. The yield on two-year Treasury notes, which closely tracks expectations for Fed policy, recorded its biggest single-day increase since early April 2025.