Fed rate hike odds in December at 88% after hot CPI- CME Fedwatch

 Markets sharply raised their bets that the Federal Reserve will hike interest rates in December following hotter-than-expected consumer inflation data on Tuesday, CME Fedwatch showed.

A swathe of hawkish statements from Fed officials also factored into increased bets on a December hike. 

Markets are now pricing in a 88.8% chance for a 25 basis point hike in December, up from about 72% a week ago, CME Fedwatch showed. 

Markets are no longer pricing in the possibility of a December hold, and are pricing a 11.2% chance the Fed hikes by 50 bps next month.

The shift in expectations was driven chiefly by stronger-than-expected consumer price index inflation data for October, released on Tuesday. 

Headline and core CPI grew faster than expected last month, driven by a mix of high energy costs and pricing related to the artificial intelligence buildout. 

The print was accompanied by hawkish commentary from Fed officials on Tuesday. Governor Christopher Waller said the central bank ought to hike rates in December, citing increasing risks from sticky inflation.

Separately, Philadelphia Fed President Anna Paulson– who has a vote on the Fed’s rate-setting board– also said she supported a “further gradual tightening” in monetary policy. 

The central bank raised rates by 25 bps in September– its first such move in three years– with Chair Kevin Warsh reiterating the bank’s commitment to its 2% inflation target. 

While the central bank did leave rates unchanged in October, analysts questioned whether the hold heralded a steeper pace of tightening in the coming months.

“In hindsight, the Fed’s decision to keep interest rates on hold in October looks to have been a mistake. Or, if the Fed prefers to wait for more data, it could mean that it is prepared to raise rates in larger increments than 25bp when it does act,” ANZ analysts said in a note. 

Third-quarter gross domestic product data read stronger than expected, as did nonfarm payrolls data for October. 

The prints showed that the two biggest overhangs for further Fed tightening– slowing growth and a weak job market– remained largely in check, giving the central bank enough headroom to consider more rate hikes.