Fed whisperer Nick Timiraos believes that three consecutive stronger-than-expected inflation reports have made a December rate hike all but certain. The policy debate has shifted to whether to raise rates by 50 basis points at once, or stick to 25 basis points each time but hike more frequently. (Previously: Winter rate hikes could come faster! Fed voter Logan argues for at least two more hikes, Deutsche Bank forecasts tightening to extend into next year) (Background: Fed holds steady! Keeps rates at 3.75%–4.00%, with two votes insisting on another 25-basis-point hike) Discussion of another Fed rate hike in December is shifting to its size and pace. (The Wall Street Journal) reporters Nick Timiraos and Matt Grossman wrote in their latest report that a run of stronger-than-expected inflation data has greatly increased the likelihood of a rate hike at the December 8–9 meeting, reopening debate about accelerating the pace of tightening. The question is not just how much to raise rates next time. Officials also have to judge whether this rate-hiking cycle requires only a few more small adjustments, or a longer stretch of tightening to bring price pressures down. Core inflation rose 0.3% for three straight months, putting pressure on gradual rate hikes The U.S. Bureau of Labor Statistics reported that the core Consumer Price Index, which excludes food and energy, rose 0.3% month over month in October on a seasonally adjusted basis, matching August and September. The monthly increase did not accelerate, but it also failed to slow further for three consecutive months. (The Wall Street Journal) noted that the annualized increase in core prices over the three months through October was 3.7%, up from 1.6% over the three months through July. The strengthening short-term price trend is challenging officials’ earlier stance that there was no need to rush into consecutive rate hikes. Officials had only tried to play down market bets on rapid, consecutive hikes in October. Now, however, the new inflation report has forced them to reassess whether gradual adjustments will be enough to curb prices, or whether they will mean that more tightening is needed later. A 50-basis-point hike at once or consecutive 25-basis-point hikes: two ways to speed up tightening There are two ways to accelerate tightening: raise rates by 50 basis points, or 2 quarter-point increments, in December; or keep each hike at 25 basis points, or 1 quarter-point increment, while increasing the likelihood of another hike in January, rather than extending the wait between hikes. Before the CPI report was released, Fed Governor Waller argued in a speech that if October core CPI rose about 0.3% month over month or more, the Fed should consider a 50-basis-point hike in December. The latest data landed within the range he cited, drawing greater attention to calls for larger individual rate hikes. However, accelerating the pace does not necessarily mean a 50-basis-point hike at once. The report cited Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, who judged that consecutive 25-basis-point hikes at successive meetings are currently more likely; he expects 25-basis-point hikes at each of the next three meetings. Philadelphia Fed President Anna Paulson, by contrast, favors gradual adjustments to give households and businesses time to adapt. She believes a faster pace would be more necessary if price pressures began to feed through to wages or the public’s inflation expectations, but she has not yet seen that happening. How the chair reconciles differences will shape the size and spacing of rate hikes In a post published on November 11 Taipei time, Timiraos summarized the options as raising rates by 25 basis points at each meeting, moving up a 50-basis-point hike, or signaling a faster succession of 25-basis-point hikes. He believes tactical choices of this kind are usually brought together and set by the chair, citing decisions by Alan Greenspan in 1994 and 2000, and by Powell in 2022. (The Wall Street Journal) noted that Warsh (Kevin Warsh), who became chair this year, has said little so far about how to respond to data like this. Officials are concerned on the one hand that moving too slowly could allow inflation to persist; on the other, they must weigh whether faster tightening would cool the economy more than necessary. The disagreement involves both the size of individual hikes and the interval between decisions. Even if each hike is only 25 basis points, switching from hiking every other meeting to consecutive hikes would still bring rates to higher levels faster, leaving households and businesses less time to adjust to rising borrowing costs. Related coverage Fed Governor Waller turns hawkish: Favors a 25-basis-point hike in December; if October CPI remains high, a 50-basis-point hike should be considered Fed hawks call for at least two more rate hikes, sending Treasury yields soaring Fed whisperer warns: May CPI report does not support rate cuts! Fed focus returns to whether it should resume rate hikes Volatility warning! Nonfarm payrolls are due tonight at 21:30; odds of a December rate hike top 60% “Fed whisperer: December rate hike all but certain; focus shifts to 25 or 50 basis points” This article was first published on BlockTempo (動區動趨 – the most influential blockchain news outlet).