[Important] Expectations of Federal Reserve rate hikes have surged sharply, hawkish signals have strengthened, and the two-year U.S. Treasury yield posted its largest single-day gain since April 2025.

November 11: US October core CPI came in above expectations, with multiple Federal Reserve officials signaling further rate hikes. On Tuesday, US Treasuries sold off, with the two-year Treasury yield rising 19 basis points in a single day to 4.75%, the largest single-day increase since April 2025, while the dollar strengthened broadly against major currencies.

US headline CPI rose 0.4% month-over-month in October, down from 0.6% in September, mainly due to slower energy price gains; core CPI, excluding food and energy, rose 0.3% month-over-month, maintaining that pace for a third consecutive month and above the 0.2% expected in a Reuters survey. Prices for auto insurance, public transportation, and medical services all rose more than expected.

Federal Reserve Governor Waller said before the data release that if monthly inflation improved, he would lean toward supporting a 25 basis point rate hike; if core CPI month-over-month growth reached around 0.3% or higher again, a 50 basis point hike at the December meeting should be considered. The subsequently released data met the threshold he mentioned, but a one-time 50 basis point hike remained a minority view within the Fed.

Dallas Fed President Logan believes that given the current economic outlook, the Fed needs at least two more 25 basis point hikes before pausing to assess the effects of policy. She believes the pace of hikes may need to accelerate but did not advocate a one-time 50 basis point hike in December. Kansas City Fed President Schmid believes the current target range of 3.75% to 4% is not restrictive enough for the economy; Federal Reserve Governor Bowman also noted that inflationary pressures remain while the labor market shows signs of strengthening.

Federal funds rate futures show the market is currently mainly betting the Fed will raise rates by 25 basis points each in December and January 2027, with another possible hike in April; previously the market mainly expected hikes in December and March of the following year. The implied probability of a 50 basis point hike in December briefly approached 15% on Tuesday before falling back to about 10%.

Omair Sharif, president of inflation research firm Inflation Insights, estimates that the US October core PCE price index may have risen 0.34% month-over-month, equivalent to an annualized rate of about 4%, accelerating from the previous month. Before the December 8-9 policy meeting, the Fed will also receive a new round of employment and inflation data.