Attention over U.S. monetary policy has shifted toward January, after a heavy round of speeches and interviews by Federal Reserve officials this week effectively cemented expectations for a December rate increase and opened the door to back-to-back hikes for the first time since 2023.
The October consumer price report released Tuesday showed inflation accelerating and spreading across a wide range of everyday goods and services, strengthening the case for tighter policy. "Inflation is still too high," New York Fed President John Williams said, while Chicago Fed President Austan Goolsbee called the data set "almost unsettling." Dallas Fed President Lorie Logan said officials may need to raise rates "sooner than I had previously expected," and Fed Governor Christopher Waller even warned a 50 basis point move could be needed next month. "A 25 basis point hike in December is clearly telegraphed," said Olu Sonola, head of U.S. economics at Fitch Ratings. "The real question is how quickly the next hike follows, and how many more will ultimately be needed." New York Fed President John Williams.
About half of the 19 officials on the Federal Open Market Committee spoke this week, including roughly half of those who hold voting rights at the December and January meetings. On those two questions, officials sent mixed signals, with views ranging from Waller's mention of a possibly larger move, to Cleveland Fed President Beth Hammack reiterating a preference for more frequent, smaller hikes, to Philadelphia Fed President Anna Paulson advocating a gradual approach.
Friday brought more unwelcome news. Data showed wholesale prices rose at their fastest annual pace since 2022 in October, and some components of the producer price index feed into the Fed's preferred inflation gauge. A jump in transportation and warehousing costs added to evidence that price pressures remain stubborn across swathes of the U.S. economy. "It now sounds like the Fed is worried it needs to move ahead of a re-acceleration in inflation, raising the frequency of hikes or even lifting what the FOMC sees as the terminal rate," said Michael Reid, head of U.S. economics at Royal Bank of Canada.
Policy expectations shift
Economists at Bank of America and Santander US Capital Markets both raised their projected number of rate increases after this week's run of data releases and official comments. Bank of America now expects the Fed to hike at three consecutive meetings, while Santander expects one move in December and another in March.
The case for caution comes from parts of the economy that are vulnerable to higher borrowing costs, such as housing. Economic data released this week showed the sector remains sluggish, with existing home sales falling last month to the lowest level in 16 years. Boston Fed President Susan Collins acknowledged Friday that higher rates hurt housing affordability, but added that over the longer term price stability matters more for the housing market and the broader economy. "To my mind, the appropriate direction of monetary policy seems clear," she said of the need to raise rates. But she did not say in the interview what pace of increases she considered appropriate. "I don't want to prejudge how high we should raise rates, or how fast," she said. Boston Fed President Susan Collins.
Stock market volatility tied to a possible slowdown in the artificial intelligence boom is another source of concern. Fed Governor Michelle Bowman warned that if returns on AI investment fall short of expectations, risks could include a sharp drop in share prices. "A decline in stock prices could erode the resilience of consumer spending," she said. "And higher interest rates could further intensify pressure on rate-sensitive sectors such as housing and small business investment."
Another variable is the possibility that energy prices fall in coming months, which would ease fuel cost pressures and give households and businesses some breathing room. Richmond Fed President Tom Barkin, who spoke Monday, said rates need to rise further but the pace should be careful. "Most Fed officials seem to agree that rates need to go higher, while leaning toward not moving too quickly," said Eric Wallerstein, chief macro strategist at Clocktower Group, who previously served as an adviser to former Fed Governor Stephen Miran.
The Fed raised rates by 25 basis points in September to a target range of 3.75%-4%, then held steady at its most recent meeting in October. Fed Chair Kevin Warsh has not spoken publicly since the October press conference, and is scheduled to discuss his AI and productivity working group at an event on Monday. Few expect him to depart from his previous stance of offering no guidance on the near-term monetary policy outlook. Investors, however, have not waited, and have already priced in 25 basis point increases in December, January and March. Before this week, investors had expected hikes only in December and March.
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