Markets Are Bracing For Another Fed Rate Hike In December – But Could It Be Twice As Big As Expected?

• The Consumer Price Index for October rose 0.4% month-on-month, beating consensus estimate of 0.3%.
• However, it was lower than September's 0.6% rise.
• Charlie Bilello, Chief Market Strategist at Creative Planning, said that the Fed should be hiking rates at every policy meeting until the gap between the U.S. consumer prices and the 2% inflation target is erased.

A hotter-than-expected October inflation has strengthened market expectations of another rate hike from the Federal Reserve in December, but the question now remains whether the central bank could decide on a 50-basis-point hike. 

With Fed Governor Christopher Waller making the case for a larger increase even before the release of the inflation data, some market participants believe that given the persistent rise in inflation and the ongoing war in Iran, a 50 bps hike would be justified, while others think the central bank should stagger its rate hike approach. 

And while the markets seem to be pricing in a 25-bps rate hike, the probability of a 50 bps hike has climbed from zero to 9.1% in a week, according to the CME FedWatch data.

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Hot October CPI Keeps Inflation Concerns Alive 

On Tuesday, the Consumer Price Index for October rose 0.4% month-on-month, beating the consensus estimate of 0.3%, although it was lower than September's 0.6% rise.

The core index, excluding volatile food and energy prices, rose 0.3% for a third consecutive month, raising concerns about persistent underlying inflation and price pressure on the economy. 

The Bureau of Labor Statistics (BLS) did not release year-over-year figures due to the government shutdown in October. 

Economist Justin Wolfers said in a post on X, “Latest inflation numbers just came out, and it's still running hot, and hotter than most expected. One hopes inflation starts returning to normal, but that's a hope right now, not a reality.”

The U.S. Producer Price Index (PPI) for October is scheduled for release on Friday, which will provide further cues on the Fed’s rate hike expectations. For September, the PPI jumped 1.3% month-over-month, higher than the 0.6% consensus, and was up 6.3% year-over-year, driven heavily by energy and fuel cost surges. 

Meanwhile, U.S. Treasury yields have jumped back higher following the hotter-than-expected inflation figures. The 10-year U.S. Treasury yield was trading at 5% at the time of writing, while the 30-year yield was at 5.358%.

Odds For A 50 Bps Hike Rise

While markets debate the level of interest rate hike likely from the Fed, data from the CME FedWatch tool has put the probability of a 50 bps rate hike at 9.1%, up from nil a week ago. The probability of a 25 bps rate hike is at 90.9%. 

The Kobeissi Letter noted in a post on X that rate hike expectations are soaring.

“In a sudden turn of events, markets are now pricing in the possibility of a 50 basis point rate hike in December,” the market commentator said, adding, “It is no longer a matter of if the Fed will hike rates in December, but rather by how much.”

Even before the inflation figures were announced, Federal Reserve Governor Christopher Waller said Tuesday that the Fed needs to follow through on additional interest rate hikes to maintain its credibility. Speaking in London, the policymaker said a hot October inflation reading should prompt a 50 basis point hike in the policy rate at the December meeting. “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,” he had said. 

Dallas Fed President Lorie Logan also warned of accelerating October PCE inflation, citing persistent core services inflation, and added that the Fed may need to raise rates faster this winter. She said that she sees at least two additional 25 bps hikes as necessary.

Why Some Policymakers Seek A More Aggressive Fed Response

Meanwhile, Charlie Bilello, Chief Market Strategist at Creative Planning, said in a post on X that the Fed should be hiking rates at every policy meeting until the gap between the U.S. consumer prices now and its 2% inflation target is erased. 

“US Consumer Prices are now 14% above where they would be had inflation actually averaged 2% since January 2020. The Fed should be hiking rates at every meeting until that gap is erased. Instead, it continues to tolerate the destruction of purchasing power while pretending its 2% inflation target still means something. A central bank that refuses to defend its own target has lost all credibility,” he said. 

Split Opinion: Wall Street Thinks 25 Bps May Be Enough

Despite the steadily rising inflation rate, some experts believe that a 25 bps rate hike in December should suffice at the current pace of growth of the economy. 

Mohamed El-Erian, chief economic adviser at Allianz, said in a social media post that given that monthly inflation for October came in hotter than expected at both the headline and core levels, and Governor Waller’s latest comments, there was no debate over whether the Fed will hike. Instead, “the conversation will center on 25 bps versus 50 bps,” he said, adding that he is the “25 bps camp regarding what the Fed will ultimately do.”

Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, believes that a 50 bps hike is unlikely. 

In a post on X, he said, “The Fed isn't going to hike 50 bps next month. Today's upside surprise to CPI is the ultimate backward-looking data point. Oil prices are down 26% from last month and we know from earlier this year that oil price spikes bleed into core CPI. This is noise.”

Meanwhile, Morgan Stanley's global head of macro strategy, Matthew Hornbach, said in an interview with CNBC that a 50 bps hike would be “taking it too far.”

Hornbach noted that the more immediate question would be whether the Fed would move from quarterly 25-basis-point hikes to raising rates at consecutive meetings.

Federal Reserve Bank of Philadelphia President Anna Paulson said ​on Tuesday that a “further gradual tightening seems appropriate," which will give the economy time to adjust to ​higher borrowing costs while simultaneously giving Fed officials space to ascertain ⁠the impact of policy decisions.

Meanwhile, Federal Reserve Vice Chair of Supervision Michelle Bowman said on Tuesday that inflation is the biggest priority, though she ​stopped short of calling for interest-rate hikes. "This indicates that there is still work to do to bring inflation closer to 2%," she said, adding that as pressures from the AI buildout and the Middle East conflict reduce, “with no inflationary pressures emerging in the labor market, my forecast is ​for core PCE ​inflation to move ⁠closer to 2% next year." 

Goldman’s Fed Forecast 

Some of Wall Street’s expectations also suggest that the Fed could favor a more measured approach instead of a sharp adjustment. Goldman Sachs analyst David Mericle said in a note, as per The Fly, that after a third consecutive month of worse inflation news, it sees the Federal Open Market Committee (FOMC) deliver a 25 bps rate hike in December, adding that a third hike in the tightening cycle would likely be coming in March of 2027. 

The firm thinks that November and December inflation reports will likely be softer, but added that it expects larger start-of-the-year price increases amidst ongoing cost pressures to boost inflation in January. 

The analyst said that while it remains confident that inflation will be meaningfully lower by the end of 2027 as the effects of tariffs, the energy shock, and AI price pressures diminish, the recent inflation prints will lead most FOMC participants to signal a third hike in the December dot plot, and a firmer January inflation report would make delivering it the path of least resistance.

What Are Retail Investors Saying?

On Stocktwits, retail traders are also batting for a rate hike in the December FOMC meeting. 

One user said, “$SPY 3 more rate hikes.  Market in denial.”

Another user said, “$SPY interst rate hike on the table on. 50 points possible.”

However, a third user said, “$QQQ $SPY Really a correction on the correction far fetched. No rate hikes period cause oil is about to dive more. Fed won’t risk people losing jobs while the market is down and affordability is nothing. They are stuck and have to wait.”

Retail sentiment around the SPDR S&P 500 ETF (SPY) was ‘bullish’ at the time of writing, while it was ‘bearish’ for Invesco QQQ Trust (QQQ) and ‘neutral’ for the SPDR Dow Jones Industrial Average ETF Trust (DIA). 

All three were headed higher at the time of writing. 

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