The hawks are circling

The October United States (US) Consumer Price Index (CPI) report, released on 10 November, removed whatever doubt remained over whether the US Federal Reserve (Fed) would follow its September hike with another in December.

US headline CPI rose 0.4% month-on-month against an expectation of 0.3%, while core CPI advanced 0.3% against an anticipated climb of 0.2%, the third consecutive print at that pace, lifting the US’s three-month annualised core rate to 3.7%, its fastest since April 2024. Due to October 2025’s data being lost during last year’s government shutdown, the Bureau of Labor Statistics did not publish annual rates, although interpolated estimates place headline inflation over the time near 4.0% and core near 2.8%.

More telling than the level of inflation was the breadth of the increase, since the gains extended across both goods and services rather than resting on the energy component that accounted for more than half of September’s 0.6% rise, which suggests that the oil shock tied to the US conflict with Iran is now working its way into the wider price structure.

US CPI “borderline disturbing”

What turned a firm print into a repricing event was the order in which information reached the market. Speaking in London hours before the release, Fed Governor, Christopher Waller, set a conditional threshold, arguing that should core CPI come in around 0.3% or higher, a 50 basis point hike ought to be considered at the 8 to 9 December Federal Open Market Committee (FOMC) meeting, because a 25 basis point move, alone, would place the Fed’s credibility at risk. The data met that condition exactly, and the regional Fed presidents who spoke afterwards reinforced the message.

Dallas Fed President, Lorie Logan, estimated that the 3.75% to 4% target range sits at least 50 basis points below the level needed for even modest restriction, noting that the real policy rate is only around 78 basis points once inflation expectations are taken into account, while Philadelphia Fed President, Anna Paulson, said further gradual tightening seems appropriate but that the Fed would move more aggressively should the inflation picture deteriorate. Chicago Fed President, Austan Goolsbee, went further, describing the report as “distressing, borderline disturbing.”

The market response was concentrated on shorter-term Treasury yields, with the two-year yield closing 17.6 basis points higher on the day in a pronounced bear flattener (where short-term interest rates increase faster than long-term rates, flattening the spread between them) while the 10-year returned to above 5%. The US Dollar Index (DXY) extended its advance to an intraday high of 103.08 earlier on Thursday, its strongest level since April 2025.

That move warrants some qualification, however, because the euro carries close to 58% of the index’s weighting, and a meaningful share of the dollar’s gain since August reflects euro weakness linked to fiscal and political strain in France and Spain, with the dollar’s advance on a broader trade-weighted basis amounting to roughly half of what the DXY implies.

Jumbo hike, at least, unlikely

Rate expectations have shifted accordingly. CME FedWatch pricing moved from around 84% odds of a December hike on 9 November to a hike now being fully priced in, with the probability of a 50 basis point move rising from zero to between 10% and 15% over the subsequent sessions, and close to 60 basis points of cumulative tightening now priced through to the 17 March 2027 meeting. The question for December is, therefore, no longer one of direction but of size, and on that point the case for a jumbo hike is weaker than the headlines suggest.

Waller’s own stated base case remains a 25 basis point increase, and his 50 basis point threshold reads as deliberate signalling, consistent with his recent defence of a communication style that shapes market probabilities without committing the FOMC to a particular outcome. More importantly, the officials pressing hardest for tighter policy are arguing for frequency rather than size, as Logan’s call for at least two further 25 basis point increases at a quicker pace and Paulson’s preference for gradual steps both point to a sequence of standard moves rather than a single outsized one.

The data supports that reading, since US core inflation holding at 0.3% for three months describes entrenchment rather than acceleration, which argues for sustained tightening rather than an emergency response, particularly with energy prices having retreated in recent weeks.

The FOMC will also vote without the November CPI, which is due on 10 December, a day after the decision, and with the 10-year yield above 5% and the dollar at an 18-month high, financial conditions have already tightened ahead of the Fed decision. A 50 basis point move in those circumstances would risk signalling that policymakers believe they have fallen behind the curve, which is precisely the impression a committee focused on its credibility would prefer to avoid.

An embedded cycle

The more consequential risk therefore lies in the path beyond December rather than in the size of the next step. Markets that entered 2026 anticipating further easing are now pricing in a tightening cycle that extends into 2027. The Personal Consumption Expenditure (PCE) index release, the Fed’s preferred inflation gauge, later this month, followed by the January and March meetings, will determine whether the cycle concludes with two further increases or runs considerably longer.