Fed Hawks Signal Rate Hikes May Stretch Beyond December Into Next Year

Inflation pressures strengthen the case for tighter policy

BofA sees three straight rate hikes

Federal Reserve officials are increasingly emphasizing the need for further tightening, shifting market attention from whether rates will rise to how quickly and how often. A December rate increase is now widely viewed as all but certain, and expectations are growing that hikes could continue in January and March next year.

John Williams, president of the Federal Reserve Bank of New York, said on Nov. 12 that the U.S. economy and labor market remain solid even as inflation stays persistent. Additional action is needed to bring inflation back to the Fed's 2% target, he said, adding that more work remains.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, also expressed concern about recent consumer inflation data. Lorie Logan, president of the Federal Reserve Bank of Dallas, said at least two more quarter-point rate increases are needed and that the Fed could move faster this winter than it did in the fall.

Federal Reserve Governor Christopher Waller also raised the possibility of a 0.5 percentage-point increase in December. That would be larger than the 0.25 percentage-point move markets currently treat as the base case. His remarks were taken as a signal that the Fed could accelerate the pace of hikes if price pressures fail to ease quickly.

The hawkish comments followed inflation readings that were stronger than expected. The U.S. consumer price index for October, released on Nov. 10, rose 0.4% from a month earlier, above the market forecast of 0.3%. Core CPI, which excludes food and energy, also increased 0.3%, topping expectations for a 0.2% gain.

The producer price index released on Nov. 13 also showed persistent inflation pressure. October PPI rose 0.3% from the previous month, slowing from September's 1.4% increase. Even so, the annual gain reached 6.5%, the highest since November 2022.

Financial markets are also beginning to price in a steeper path for rate increases. The prevailing view had been for quarter-point hikes in December and March next year. More recently, however, the possibility of a January move has also entered the discussion. That would mean the Fed raises rates at the December Federal Open Market Committee meeting and continues tightening at the next meeting as well.

Bank of America added a January hike to its forecast and now expects three straight quarter-point increases in December, January and March next year. If that path materializes, the target range for the benchmark rate would rise from the current 3.75%-4.00% to 4.50%-4.75%. Santander, by contrast, forecast only two hikes, in December and March, highlighting differing views on the pace of tightening.

Even within the Fed, officials who support further tightening are also urging caution on the size and speed of future moves. Susan Collins, president of the Federal Reserve Bank of Boston, said the direction of monetary policy is clear, but the pace and eventual end point remain uncertain. She added that additional tightening would likely be appropriate soon.