The Federal Reserve is weighing something it hasn't done since December 2022: raising interest rates by half a percentage point at a single meeting.
And Wall Street is starting to bet on it.
Veteran market strategist Ed Yardeni joined the rising chorus of economists predicting a 50-basis-point hike in December after the October inflation report flashed a third straight month of sticky core prices.
"We believe such a move is warranted," Yardeni said in a note Tuesday.
A half-point increase would lift the federal funds rate from 3.75%-4.00% to 4.25%-4.50%. That is the range Yardeni Research estimates as neutral.
The last time the Fed raised rates by 50 basis points was Dec. 14, 2022. Back then, the half-point hike was a step down after four straight 75-point moves. This time it would be a step up.
The Inflation Report That Met Waller's Test
Consumer prices rose 0.4% in October after a 0.6% gain in September, the Bureau of Labor Statistics said Tuesday. Economists had expected 0.3%.
Core CPI, which strips out food and energy, rose 0.3% for a third consecutive month, above the 0.2% consensus.
That number mattered because of who had set it as a threshold.
Hours before the release, Fed Governor Christopher Waller told the Bank of England Watchers Conference in London that a core reading around 0.3% or higher would call for stronger action.
"In that case, I believe a 50-basis point hike in the policy rate should be considered at the December meeting," Waller said.
Waller added that hiking by only 25 basis points would put the Fed's credibility at risk, calling it "a risk I am not eager to take."
Yardeni Saw the Smoke in October
Yardeni had already called the Fed's October decision to hold rates puzzling. Before the meeting, the strategist had predicted a 50-point move in December if policymakers held off.
The Federal Open Market Committee voted 10-2 on Oct. 28 to keep rates unchanged. Both dissenters favored a 25-point hike.
According to Yardeni, inflation pressures are now broad, led by energy, food and transportation services. The strategist traces renewed goods inflation to three forces: the artificial intelligence investment boom, higher energy prices tied to the Iran war, and tariffs.
Services prices excluding shelter rose 0.4% in October.
Small businesses are sending the same signal. In the NFIB survey, the net share of owners planning to raise selling prices jumped to 37%, the highest since July 2022.
Short-Term Bonds Repriced Fast
The bond market reacted within hours.
The two-year Treasury yield, which tracks Fed expectations most closely, jumped 18 basis points to 4.75% on Tuesday. The 10-year yield climbed 12 basis points to 5.00%.
The iShares 1-3 Year Treasury Bond ETF (SHY) fell 0.3%.
"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, posted on X.
Polymarket Is Already Looking Past December
On Polymarket, the odds of a December hike stand at 97%.
The chance of a 50-point move is still low, at 11%. However, it was below 1% a day earlier.
January is the real surprise. Bets on a second hike at the Jan. 26-27 meeting surged from 17% to 50% within a few hours.
As a result, traders now see a December hike as almost certain. They are also no longer treating it as the last one.
The Fed meets Dec. 8-9. For now, markets lean toward a quarter-point increase, while a growing group of economists, Yardeni among them, argues that a quarter point may not be enough.
SHY Price Action: The iShares 1-3 Year Treasury Bond ETF was down 0.04% at $81.29 in premarket trading at the time of publication Wednesday, according to market data.
