Until this week, Wall Street was arguing over whether the Federal Reserve would raise interest rates in December. After Tuesday's inflation report, the argument has moved on to how big the hike should be.
Consumer prices rose 0.4% in October and core prices climbed 0.3%, both above forecasts. The report landed hours after Fed Governor Christopher Waller said a core reading around 0.3% or higher would put a half-point hike on the table.
"Especially following Governor Waller's latest comments, you can set aside any debate over whether the Fed will hike by 25 basis points or pause next month; the conversation will center on 25 bps versus 50 bps," Mohamed El-Erian, chief economic adviser at Allianz, said in a post on X.
Yet a closer look at who said what on Tuesday shows a split. Several prominent voices now treat a 50-basis-point move as a real risk.
Prediction markets moved quickly. On Polymarket, the odds of a hike of 50 basis points or more in December jumped to 11% from less than 1% a day earlier.
A quarter-point hike remains the clear favorite at 85%, up from 79%. Meanwhile, the odds that the Fed leaves rates unchanged collapsed to 3% from 21%.
The Case for a Half-Point Hike Got Stronger
"We flagged the possibility of a 50 basis point hike in Dec a couple of weeks ago, but the data & Waller's comments today mean that risk is real," Liz Thomas, head of investment strategy at SoFi, said in a post on X.
By Thomas' unrounded figures, headline prices rose 0.35%, core prices 0.30% and so-called supercore prices, which track services excluding housing, 0.40%.
Joseph Brusuelas, chief economist at RSM US, went further, tying the gains in grocery prices, energy and transportation services to supply disruptions from the war in the Middle East, as higher diesel costs pass through to freight and food.
"This report does tend to suggest that a supersize hike will be on the table at the December Fed meeting," Brusuelas said in a post on X. "This requires rate hikes by the Fed."
The breadth of price gains also widened. According to Pantheon Macroeconomics, the share of core components rising at an annualized pace above 3% climbed to 59% in October from 51% in September.
"This report has no silver lining," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a note Tuesday.
Most Forecasters Still Expect a Quarter-Point Move
Even so, Tombs still forecasts a 25-basis-point hike in December. The economist doubts Waller speaks for the whole committee, and said speeches from Fed officials Michael Barr and Philip Jefferson later this week should clarify the picture.
El-Erian sits in the same camp: "For what it is worth, I am in the 25 bps camp regarding what the Fed will ultimately do."
Chris Zaccarelli, chief investment officer at Northlight Asset Management, also expects a quarter-point move but said the bigger question has changed.
"The new question is whether or not the Fed will follow that up immediately with a second 0.25% rate hike in January – which would have been unexpected before today," Zaccarelli said in emailed comments.
Meanwhile, Bernard Yaros, deputy chief U.S. economist at Oxford Economics, said food, not energy, drove the miss in headline inflation.
"Grocery-store inflation accelerated notably after a string of quiescent readings, underscoring the lags between energy price shocks and nonenergy consumer prices," Yaros said in emailed comments.
Bond Traders Are Pricing a Longer Hiking Cycle
Bonds sold off as short-dated yields led the move.
The two-year Treasury yield rose 16 basis points to 4.73%, while the 10-year yield climbed 10 basis points to 4.99% and the 30-year yield added 7 basis points to 5.35%. Part of the move came after Waller's speech, before the data.
As a result, the gap between two-year and 10-year yields narrowed by about 6 basis points to 26 basis points. The iShares 20+ Year Treasury Bond ETF (TLT) fell 1.4%.
The bigger shift sits further out on the curve.
The rate implied by December 2027 Secured Overnight Financing Rate (SOFR) futures jumped 21.5 basis points to 4.63%, compared with a 12-basis-point rise to 4.29% for the December 2026 contract. In other words, traders are no longer pricing just one more hike. They are adding tightening into 2027.
Stocks fell in late-morning trading. The State Street SPDR S&P 500 ETF dropped 0.7%, the State Street SPDR Dow Jones Industrial Average ETF Trust lost 0.6% and the Invesco QQQ Trust slid 0.9%.
Gold fell 2.2% to $4,049 an ounce and silver dropped 2.7% to $51.96 as the dollar index gained 0.4%. Bitcoin (CRYPTO: BTC) slipped 0.5% to $74,385.
Oil Is Already Moving Against the Hawks
There is one complication for the half-point case.
West Texas Intermediate crude fell 1.6% to $85.47 a barrel on Tuesday. The argument for a bigger hike rests largely on energy costs feeding into food and transport prices, and that input is now falling.
"The risk for those betting on further tightening, especially a larger 50-basis-point hike, is that inflation pressures may already be easing," Ole Hansen, head of commodity strategy at Saxo Bank, said in a post on X.
The November inflation report will not be released until after the Dec. 9 meeting. That leaves the Fed to choose between 25 and 50 basis points using October data, while lower energy prices point the other way.
