Fed whisperers: A December rate hike is all but certain; focus shifts to 25 or 50 basis points
Wall Street Journal reporters Nick Timiraos and Matt Grossman, often dubbed “Fed whisperers,” say that after three consecutive stronger-than-expected U.S. inflation reports, a rate hike at the Federal Open Market Committee (FOMC) meeting on December 8–9 is all but certain. The current policy debate is whether to raise rates by 50 basis points (2 pips) at once, or stick with gradual 25-basis-point (1-pip) increases while hiking more frequently.
Core inflation rose 0.3% for three months in a row, putting pressure on gradual rate hikes
Data released by the U.S. Bureau of Labor Statistics show that the core Consumer Price Index (CPI), which excludes food and energy, rose 0.3% month over month in October after seasonal adjustment, unchanged from August and September. Although the monthly increase did not accelerate further, it also failed to slow for a third consecutive month.
The annualized increase in core prices over the three months through October reached 3.7%, well above the 1.6% annualized increase over the three months through July. The strengthening trend in short-term prices challenges officials’ earlier stance that there was no need to raise rates consecutively. Officials are reassessing whether gradual adjustments will be enough to curb prices, or whether they could lead to a greater tightening cost later on.
A 50-basis-point increase at once and consecutive 25-basis-point increases are two paths to faster tightening
In response to inflationary pressure, the Fed faces two possible paths to accelerate monetary tightening:
A direct 50-basis-point increase: Raise rates by 50 basis points at the December meeting. In a speech before the CPI release, Fed Governor Waller argued that if October’s core CPI rose by 0.3% or more month over month, a 50-basis-point increase should be considered in December.
Consecutive 25-basis-point increases: Keep each rate hike at 25 basis points, but increase the likelihood of another hike in January next year, shortening the interval between rate increases.
However, some officials favor a more cautious approach. Philadelphia Fed President Anna Paulson favors gradual adjustments, giving households and businesses time to adapt. She believes the Fed should move faster only when price pressures begin to feed through to wages or the public’s inflation expectations, and she has not yet observed this happening.
How the chair reconciles differing views will shape the size and timing of rate hikes
Nick Timiraos’s analysis says the Fed’s current tactical options can be summarized as raising rates by 25 basis points at each meeting, moving to a 50-basis-point increase sooner, or signaling more frequent 25-basis-point hikes. Such key decisions are typically shaped by the chair.
With Warsh (Kevin Warsh), who took over as chair this year, not yet having fully clarified how he will respond to this kind of data, markets are closely watching how the Fed will balance “preventing inflation from persisting” against “avoiding an excessive cooling of the economy.” Even if each hike is only 25 basis points, switching to consecutive increases at successive meetings would still significantly accelerate the pace at which borrowing costs rise.
Wall Street Journal reporters Nick Timiraos and Matt Grossman, often dubbed “Fed whisperers,” say that after three consecutive stronger-than-expected U.S. inflation reports, a rate hike at the Federal Open Market Committee (FOMC) meeting on December 8–9 is all but certain. The current policy debate is whether to raise rates by 50 basis points (2 pips) at once, or stick with gradual 25-basis-point (1-pip) increases while hiking more frequently.
Core inflation rose 0.3% for three months in a row, putting pressure on gradual rate hikes
Data released by the U.S. Bureau of Labor Statistics show that the core Consumer Price Index (CPI), which excludes food and energy, rose 0.3% month over month in October after seasonal adjustment, unchanged from August and September. Although the monthly increase did not accelerate further, it also failed to slow for a third consecutive month.
The annualized increase in core prices over the three months through October reached 3.7%, well above the 1.6% annualized increase over the three months through July. The strengthening trend in short-term prices challenges officials’ earlier stance that there was no need to raise rates consecutively. Officials are reassessing whether gradual adjustments will be enough to curb prices, or whether they could lead to a greater tightening cost later on.
A 50-basis-point increase at once and consecutive 25-basis-point increases are two paths to faster tightening
In response to inflationary pressure, the Fed faces two possible paths to accelerate monetary tightening:
A direct 50-basis-point increase: Raise rates by 50 basis points at the December meeting. In a speech before the CPI release, Fed Governor Waller argued that if October’s core CPI rose by 0.3% or more month over month, a 50-basis-point increase should be considered in December.
Consecutive 25-basis-point increases: Keep each rate hike at 25 basis points, but increase the likelihood of another hike in January next year, shortening the interval between rate increases.
However, some officials favor a more cautious approach. Philadelphia Fed President Anna Paulson favors gradual adjustments, giving households and businesses time to adapt. She believes the Fed should move faster only when price pressures begin to feed through to wages or the public’s inflation expectations, and she has not yet observed this happening.
How the chair reconciles differing views will shape the size and timing of rate hikes
Nick Timiraos’s analysis says the Fed’s current tactical options can be summarized as raising rates by 25 basis points at each meeting, moving to a 50-basis-point increase sooner, or signaling more frequent 25-basis-point hikes. Such key decisions are typically shaped by the chair.
With Warsh (Kevin Warsh), who took over as chair this year, not yet having fully clarified how he will respond to this kind of data, markets are closely watching how the Fed will balance “preventing inflation from persisting” against “avoiding an excessive cooling of the economy.” Even if each hike is only 25 basis points, switching to consecutive increases at successive meetings would still significantly accelerate the pace at which borrowing costs rise.