Fed Officials Stress Need for Further Tightening... December "Jumbo Hike" Gains Traction

Prospects for a jumbo hike grow after October CPI tops expectations
Waller: "If core CPI is 0.3% or higher, consider a jumbo hike"

As senior officials at the U.S. Federal Reserve (Fed) have successively stressed the need for further rate hikes, the possibility of a 0.5-percentage-point “jumbo hike” in the benchmark interest rate this December is gaining traction.

On November 10 local time, Fed Governor Christopher Waller said at a Bank of England (BOE)-related conference in London that he believes the Fed should raise the benchmark interest rate by at least 0.25 percentage points at the Federal Open Market Committee (FOMC)’s regular meeting on December 8-9.

Fed Governor Christopher Waller

Waller said the U.S. economy was maintaining solid growth and the labor market was stable, but inflation remained well above the Fed’s 2% target.

“Even if inflation improves in October as expected, I am leaning toward supporting a 0.25-percentage-point rate hike at the December meeting,” he said.

He also said the Fed could increase the size of the hike if inflation proves stronger than expected. “If core CPI inflation in October comes in around 0.3%, similar to the past two months, or higher, a stronger policy response may be needed,” Waller said. “In that case, we should consider raising the benchmark interest rate by 0.5 percentage points at the December meeting.”

“Raising rates by only 0.25 percentage points could put our credibility at risk, and I do not want to take that risk,” he added.

In fact, U.S. core CPI for October, released after Waller’s speech, rose 0.3% from the previous month, exceeding the market forecast of 0.2%. Overall CPI also rose 0.4% month over month, above the forecast of 0.3%. Core CPI inflation has held at 0.3% for three consecutive months since August.

With the inflation rate Waller set as a condition for considering a jumbo hike confirmed in the data, market attention has turned to the size of a potential rate hike in December.

During a subsequent question-and-answer session, Waller also stressed that he was not advocating aggressive tightening that would trigger a sharp recession. He said current monetary policy was not as restrictive as he had expected.

Dallas Fed president says “at least two rate hikes remain clearly necessary”

Lorie Logan, president of the Federal Reserve Bank of Dallas, also stressed the need for further rate increases. Speaking at a joint energy conference hosted by the Dallas and Kansas City Federal Reserve Banks in Houston, Texas, on November 10, Logan said, “Given the current economic outlook, it remains clear that the FOMC should raise rates by 0.25 percentage points at least twice.”

“The exact pace of rate increases may depend on short-term economic and financial conditions,” she said. “This winter, the FOMC may move faster than it did this fall.”

She also noted that current monetary policy was not sufficient to curb inflation. Logan estimated that the current target range for the federal funds rate was at least 0.5 percentage points below the level needed to moderately restrain economic activity and bring inflation back to its target.

“Tighter monetary policy is needed to achieve an appropriate balance between the inflation and employment outlooks and the risks,” she said, stressing that “it is important to reach that balance quickly.” She particularly warned that “the longer inflation remains above target, the greater the risk that it will become embedded in the behavior of economic participants.”

Logan said inflationary pressures were persisting across a broad range of sectors, including services prices, as well as energy prices driven higher by the war in the Middle East.

She noted that in September, the core personal consumption expenditures (PCE) price index, excluding food and energy, rose 3.1% from a year earlier, while core services prices excluding housing and transportation increased 3.2%. She said underlying price pressures may not ease easily even if temporary shocks, such as rising energy prices, subside.

Logan also said in a speech at Davidson College in North Carolina late last month that the benchmark interest rate should be raised at least twice.

This content was produced with the assistance of AI translation services.