October prices intensify the Fed’s inflation concerns
Chicago Federal Reserve President Austan Goolsbee described the latest inflation figures as “borderline disturbing” in a Tuesday interview with PBS NewsHour, according to CNBC. His remarks followed another stronger-than-expected consumer price report and came as central bank officials debated whether further interest-rate increases would be needed at their final policy meeting of the year in December.
The Bureau of Labor Statistics reported Tuesday morning that the consumer price index increased 0.4% in October on a seasonally adjusted basis. The rise exceeded economists’ expectations and marked the third consecutive month of unusually strong price increases. For policymakers, the report added to evidence that inflation pressures were persisting rather than subsiding.
Tariffs, services and expectations trouble Goolsbee
Goolsbee said price pressures associated with tariffs had not faded as he had hoped. He also singled out continuing high inflation in services as a concern. His assessment suggested that the challenge was not limited to a single source of price increases. He said inflation was a recurring issue in his conversations with businesses, nonprofit organizations and consumers.
Beyond the latest monthly figures, Goolsbee warned about the possibility that households and businesses could begin to expect persistently elevated inflation after years of price growth above policymakers’ preferred level. He said that development would make bringing inflation down more painful. His comments described a risk, however, rather than a conclusion that such expectations had already become entrenched.
Waller and Logan outline stronger tightening options
Other Fed officials offered more specific views on the possible policy response. Speaking in London early Tuesday, Fed Governor Christopher Waller said a strong inflation reading could lead him to support a half-percentage-point increase in December. He identified a monthly core CPI increase of around 0.3% as a reading that should put that option under consideration. Core CPI, which excludes volatile food and energy prices, subsequently came in at that level.
Dallas Fed President Lorie Logan, speaking after the release, said she saw a need for two more quarter-percentage-point increases. She also suggested that the Federal Open Market Committee could tighten more quickly during the winter than it had during the fall. Both officials’ remarks pointed toward additional restraint, but neither amounted to an agreed committee decision on the size or timing of the next move.
December decision follows an October pause
The Fed raised its benchmark rate range by a quarter percentage point in September, bringing it to 3.75%–4%, and then left rates unchanged in October. A half-point increase would be larger than the quarter-point adjustment the central bank typically makes when changing rates. The new inflation figures have therefore sharpened the debate over both whether to resume tightening and how rapidly to proceed.
Goolsbee declined to commit to a December increase, saying he preferred not to constrain future decisions by giving a precise policy prescription in advance. CNBC identified Waller, Logan and Paulson as voting FOMC members this year, while Goolsbee is due to vote next year. His inflation warning consequently should not be read as an explicit endorsement of either a quarter-point or half-point move at the coming meeting.
Futures price in a hike, with its size still uncertain
Following the inflation release and officials’ comments, federal funds futures fully priced in a December rate increase, according to CME’s FedWatch tool as reported by CNBC. The implied probability of a half-point move stood at 15%, leaving a quarter-point increase as the more heavily weighted outcome. These probabilities reflect market pricing, not a commitment by the Fed.
For the January meeting, futures assigned a 60% probability to rates reaching 4.25%–4.5%, equivalent to a cumulative half-point increase from the current range through either one larger move or two quarter-point steps. They also indicated a 10% chance of a 4.5%–4.75% range by then. The immediate uncertainty is how aggressively officials will respond in December, with subsequent decisions also depending on whether incoming inflation readings remain strong.
Source: CNBC