The pace of interest rate hikes this winter may be faster than the progress made so far this autumn.

Written by: Yang Chen, Wall Street Watch

Federal Reserve officials have notably heightened their concerns about inflation, with a more hawkish stance emerging.

This year's FOMC voting member, Dallas Fed President Lorie Logan, stated on Tuesday that the Federal Reserve needs to raise interest rates at least two more times, and the pace of these hikes this winter may be faster than this autumn. On the same day, Fed Governor Christopher Waller urged consideration of a 50 basis point rate hike at the December meeting. Meanwhile, the October CPI data in the U.S. exceeded expectations, with core inflation rising 0.3% month-over-month, further strengthening market expectations for tightening policies.

Nick Timiraos from the "New Federal Reserve News" emphasized that Logan stated today that after the stronger-than-expected October inflation data, the Federal Reserve may need to accelerate the pace of rate hikes.

Driven by these statements and the inflation data, U.S. Treasury yields surged significantly. The two-year Treasury yield jumped 19 basis points in a single day to 4.74%, marking the largest single-day increase since Trump announced tariffs in April this year; the dollar strengthened against all major currencies.

The market reacted quickly to the hawkish signals, with investors moving up their expectations for the Federal Reserve's rate hike path in the coming months, yet maintaining caution regarding a potential 50 basis point hike in December.

Data from federal funds futures shows that the market is currently pricing in a 25 basis point rate hike in December, another 25 basis points in January, and possibly another in April; whereas the previously expected timeline was December and March of next year.

At least two more rate hikes, pace may accelerate

On Tuesday, Logan clearly stated at a meeting in Houston: "Given the current economic outlook, I believe the Federal Open Market Committee needs to implement at least two more rate hikes of 25 basis points each."

She also added, "The pace of rate hikes this winter could be faster than the progress we've made this autumn," but the specific path will still depend on economic data and financial conditions.

Logan indicated that the current monetary policy stance is still supporting the economy and, to some extent, elevating inflationary pressure. The stock market has risen strongly this year, and credit conditions remain relatively loose, generally providing a tailwind for economic activity.

She pointed out that two more rate hikes would push the federal funds rate target range to 4.25% to 4.5%, which would impose a moderate degree of limitation on the economy.

The Federal Reserve maintained interest rates at its meeting on October 27 to 28, after raising them by 25 basis points in September—the first rate hike of 2023 aimed at curbing inflation that has remained above the 2% target for over five years. At the September meeting, most officials predicted that at least one more rate hike would be needed this year.

Recently, several Federal Reserve officials have reiterated this judgment in public speeches but tend to maintain a gradual pace. Waller is among the most hawkish, explicitly suggesting that a 50 basis point hike should be considered at the December meeting.

Inflation pressures are widespread and carry persistent risks

Logan expressed clear concerns about the inflation outlook. She noted that inflation pressures are no longer confined to categories of goods and services closely related to energy and AI infrastructure construction but are spreading more broadly. Global tensions are exacerbating supply chain disruptions, further increasing price pressures.

She also expressed caution regarding the Fed's preferred inflation indicator—the Personal Consumption Expenditures (PCE) price index—which is set to be released later this month, believing that the October data could show a rebound trend similar to the CPI.

Logan warned that "the longer inflation stays above target levels, the greater the risk that it becomes entrenched as behavioral inertia."

She emphasized that although inflation is expected to gradually decline after the price pressures on energy and manufactured goods ease, "the broader inflation trend is more likely to persist." Against this backdrop, she called for the prompt implementation of restrictive policies to strike an appropriate balance between inflation and employment prospects.