Stories
Traders Bet Fed May Hike Twice or by Half Point in December After Hot CPI
- •The consumer price index rose 3.7% year-over-year in September, exceeding the 3.6% gain forecast by Dow Jones and complicating the Federal Reserve's rate path.
- •Markets reacted negatively as stocks dropped and Treasury yields spiked following the release of the hotter-than-expected inflation data.
- •Traders increased bets on future rate hikes, pricing in a greater than 95% chance of at least one hike before the end of the year.
- •Economists warn that sticky core inflation, driven partly by energy price shocks and geopolitical risks, may force the Federal Reserve to keep interest rates elevated for longer.
Key Questions Answered
September's consumer price index rose 3.7% year-over-year, exceeding forecasts and prompting traders to reprice fed funds futures. Odds for an October rate hike jumped to 53.7%, while December expectations showed a greater than 95% chance of at least one hike, including a 40% probability of a half-percentage point increase.
Economists point to energy price shocks caused by conflicts in the Middle East, which are driving up costs for core goods and services as businesses pass expenses onto consumers. Additionally, higher diesel prices and pressures from the artificial intelligence boom are contributing to broad-based price increases.
Strategists warn that higher near-term rate hikes will create a modest headwind for risk assets, pressure the long end of the yield curve, and strengthen the dollar while depressing equity valuations. Furthermore, annual headline CPI has outpaced wage growth for six consecutive months, squeezing consumer purchasing power.
