By Howard Schneider
WASHINGTON, Nov 10 (Reuters) - The odds that the Federal Reserve may raise interest rates by half a percentage point next month jumped on Tuesday after US data showed prices rising faster than expected in October and policymakers opened the door to a quicker pace of rate hikes.
The Consumer Price Index rose 0.4% on a monthly basis in October, down from the 0.6% registered in September as energy inflation receded. The index excluding volatile food and energy prices, however, rose 0.3%
for the third month in a row, evidence of persistent "core" inflation and price pressures spreading through the economy.
In comments overnight in London, Fed Governor Christopher Waller said a core CPI reading of 0.3% in October would prompt him to consider a half-percentage-point hike at the US central bank's December 8-9 meeting. With a quarter-percentage-point hike all but assured, market bets on a larger increase were rapidly building amid a powerful bond market selloff. The probability was close to 15% in the middle of the morning before retreating to about 10% in the late afternoon.
If core consumer prices rise 0.3% or more from September, "a stronger policy move may be needed," Waller said at a conference hosted by King's Business School and the Money Macro & Finance Society. "In that case, I believe a 50-basis-point hike in the policy rate should be considered at the December meeting."
Sticking with a smaller rate increase, Waller said, risks hurting the Fed's inflation-fighting credibility, given inflation that is too high and appears to be broadening.
Economists polled by Reuters had expected core monthly inflation to drop to 0.2% in October. The CPI data and Waller's comments drove the selling in the US Treasury market, with the yield on 2-year notes — a proxy for Fed policy expectations — rising by the most since early April 2025.
Dallas Fed President Lorie Logan said in separate remarks at an energy conference that it "may be possible to move more rapidly" than the quarter-percentage-point hike approved in September. Logan said she feels the Fed needs to raise rates by at least half a percentage point before pausing to take stock.
"The goal should be to make policy modestly restrictive so we can sustainably deliver both maximum employment and stable prices," Logan said, noting that the current 3.75%-4.00% policy rate was too low and "adding to inflationary pressures."
Kansas City Fed President Jeffrey Schmid, who hosted the conference with Logan, said inflation is "top of mind" for him and that he believes the central bank's policy rate is "fairly accommodative." He asked attendees to think of themselves as Fed policymakers and to indicate whether they felt the Fed should cut, hold steady or raise rates in December; none picked a cut, and a large majority picked a hike.
"Isn't that kind of interesting? And I think it's actually instructive," he said, adding that a big part of his job is to demystify what the Fed does, including how it makes rate-setting decisions.
ONGOING INFLATION RISKS
The October inflation data followed US midterm elections last week that revolved around cost-of-living issues and ended in a rebuke of President Donald Trump and his Republican Party.
The October data showed unexpected jumps in the cost of auto insurance, public transportation and medical services, increases that could land particularly hard on middle- and lower-income households. Policymakers see those groups as the weak link in an overall solid consumer spending picture.
"There was not much in today's report to assuage concerns about ongoing inflation risks or the fact that the Fed will need to hike rates further to tamp down price pressures," Omair Sharif, president of Inflation Insights, wrote after the release of the CPI data.
He said the data put the core Personal Consumption Expenditures Price Index on track to rise 0.34% in October, which would translate into a 4% annualized pace and represent an increase from the prior month. The Fed uses the PCE Price Index to measure progress toward its 2% inflation target, but it considers the core figure a better measure of inflation trends.
(Reporting by Howard Schneider; Editing by Andrea Ricci and Paul Simao)
