Reaccelerating inflation and broad-based price pressures have pushed the Federal Reserve toward a collective hawkish stance, prompting institutions and the market to raise rate-hike expectations and triggering volatility in US Treasuries. Meanwhile, pressure on real estate, consumption that remains to be observed, and valuation and cyber risks brought by the AI boom require the central bank to carefully weigh the balance between curbing inflation and preventing risks. The pace and endpoint of rate hikes still depend on subsequent data.
Market expectations for a December rate hike have further strengthened, opening the door for another hike in January next year. October CPI showed that the scope of price increases continued to expand, with core CPI, excluding food and energy, rising about 0.3% month on month in each of the past three months, above the 0.2% or lower level needed to meet the 2% inflation target.
San Francisco Fed President Mary Daly said the Fed will likely need to raise rates further, as companies are finding it increasingly difficult to absorb costs by compressing profit margins, and some are considering passing pressure on to consumers. She is particularly concerned about sticky services inflation excluding housing costs. Governor Christopher Waller suggested a possible 50-basis-point hike in December. Fitch Ratings’ Olu Sonola said a 25-basis-point hike in December is basically certain, with the key lying in the subsequent pace and number of hikes. Further rate hikes have become a consensus, but there is still disagreement over the speed and the terminal rate.
Several Wall Street institutions have raised their rate-hike forecasts. Bank of America expects consecutive hikes at the next three meetings, while Santander US Capital Markets expects one hike each in December and March next year. Investors have priced in 25-basis-point hikes each in December, January next year and March. Influenced by hawkish remarks and stronger-than-expected data, the two-year US Treasury yield surged 19 basis points in a single day to 4.75%, the largest one-day increase since the tariff turmoil in April 2025.
High interest rates are exacerbating economic difficulties: October existing home sales fell to a 16-year low, and real estate remains under pressure. Boston Fed President Susan Collins acknowledged that high rates have weakened housing affordability but stressed that long-term price stability is more important. Daly noted that consumer spending has so far remained resilient, but there have been feedback signals of weakening momentum.
The Fed’s semi-annual Financial Stability Report warned that the AI investment boom has driven stock valuations high, and related circular investment, procurement and computing-power contract arrangements have raised concerns about investment returns and financing sustainability. Vice Chair Michelle Bowman warned that returns falling short of expectations could lead to sharp stock price declines, while related cyberattacks, risk asset pullbacks and rising long-term rates were also listed as near-term threats.
The Fed raised rates by 25 basis points in September this year, bringing the target range to 3.75%–4%, and kept rates unchanged in October. Robert Sockin, chief US economist at PGIM, believes that gradual rate hikes amid strong growth and high inflation may be a policy error, and that if inflation is not curbed in a timely and forceful manner, the Fed may ultimately be forced to tighten faster and more sharply.
