Fed officials weigh faster rate hikes as inflation spreads beyond energy costs

The latest consumer-price index showed inflation at a 4% year-over-year pace in October, up from 3.7% in September, indicating that price pressures are extending beyond energy and tariff-related shocks. Dallas Fed President Lorie Logan said services such as medical visits, childcare, dining out and hotel stays continue to see strong price gains and that the broader inflation trend is likely to persist. She supported two more quarter-point rate hikes and suggested the Fed could "move more rapidly this winter" than it has so far this fall.

Philadelphia Fed President Anna Paulson warned that underlying inflation remains above target and is not expected to fall without policy action, though she favoured only gradual increases. In a separate speech, Fed Governor Christopher Waller noted that 70% of services prices rose by at least 3% in September and said a core-inflation reading of 0.3% or higher would justify a half-point hike, which matched the October core-inflation increase.

Market participants now assign a roughly 90% probability to a rate increase at the Fed’s Dec. 8-9 meeting, according to CME FedWatch futures, and the odds of a second hike in January have risen to more than 64%.

Fed Governor Michelle Bowman, speaking at the Council on Foreign Relations, said recent data suggest that price pressures are broadening beyond the categories that previously drove inflation.

Despite a recent decline in oil prices, Fed officials cautioned that geopolitical factors, such as the Iran conflict and tanker-insurance costs, could keep energy costs elevated. Waller added that limited refining capacity, partly affected by the Ukraine war, may also support higher diesel prices.