Yesterday’s hot US October CPI jolted markets. USD rallied across the board, Treasuries sold-off led by the short-end, and US stocks fell. Today, USD is consolidating its gains, US equity futures are rebounding strongly on improved AI sentiment, while bonds in Asia followed Treasuries lower.
The US inflation surprise shifted the FOMC December rate debate from whether to hold or hike 25bps to a choice between a 25bps or 50bps hike. Indeed, Fed funds futures moved to price-in as much as 15% odds of a 50bps increase on December 9. That hawkish shift bodes well for USD.
The monthly rise in US CPI was a touch higher than expected and inflation momentum accelerated. Headline CPI rose 0.4% m/m (consensus: 0.3%) vs. 0.6% in September, and core CPI printed at 0.3% m/m for a third straight month (consensus: 0.2%). Fed Governor Christopher Waller warned yesterday that a 50bps hike should be considered if core CPI inflation is “around 0.3 percent or even higher.”
Meanwhile, three-month annualized inflation picked up, signaling price pressures are strengthening. Also, inflation measures which filter out extreme price swings (trimmed, sticky, and median) quickened further above 2%.
Post-US CPI comments from Fed officials reinforced the case for additional policy tightening:
Dallas Fed President Lorie Logan (2026 FOMC voter) remarked “given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases…It may be possible to move more rapidly this winter than the FOMC has moved so far this fall.”
Interestingly, Logan pointed out that estimates of the neutral real interest rate currently range from 1.00% to 1.85%, while the real fed funds rate is 0.78% (nominal rate of 3.88% - expected PCE inflation of 3.1%). That makes the real fed funds rate roughly 25bps below the lowest estimate of neutral, consistent with accommodative monetary policy. Kansas City Fed President Jeff Schmid (non-voter) echoed that assessment, describing the current policy rate as “fairly accommodative.”
Fed Vice Chair for Supervision Michelle Bowman also struck a hawkish tone noting “I am seeing signs that inflation pressures are persisting, while labor market conditions appear to be firming. This indicates that there is still work to do to bring inflation closer to 2 percent.”
Finally, Philadelphia Fed President Anna Paulson (2026 FOMC voter) was more cautious. Paulson said “I would want to act more quickly if inflation expectations drift up, if wage pressures build, or if underlying inflation moves higher…Right now, that's not what I'm seeing.”
Stalled real wage growth underscores Paulson’s point and is a big red flag for the consumer spending outlook. Real personal income excluding transfers dipped -0.2% in the three months to September, and in October, nominal average hourly earnings matched the 0.4% m/m increase in headline CPI.
