Fed Officials Warn on Inflation as Markets Brace for December Rate Hike
TREE NEWS reports: Two Federal Reserve officials warned Friday that inflation is spreading and that the central bank may need to tighten policy further, even as Treasury Secretary Scott Bessent argued that the current inflation is largely an energy shock from the Iran war and should not trigger a rate hike. The remarks came as markets overwhelmingly expect a 25-basis-point increase at the December meeting, with the probability of a 50-basis-point move at around 15%.
Chicago Fed President Austan Goolsbee, a voter next year, said inflation is moving in the wrong direction and the Fed needs to rebuild its anti-inflation credibility. Boston Fed President Susan Collins, a voter the year after, said inflation remains too high and is broadening, and that further tightening may be necessary soon, though she prefers a cautious approach. Earlier, New York Fed President John Williams said inflation is still too high and the Fed has more work to do to get policy to the right place.
The comments came after October producer prices rose 6.5% year-over-year, the highest since November 2022, though the monthly gain of 0.3% was below expectations. Core PPI held at 5.0% year-over-year. Food prices and transportation costs were the main drivers.
Market Impact
The prospect of further tightening is already rippling through markets. The two-year Treasury yield jumped more than 30 basis points last week, the largest weekly rise in two years, ending a six-week decline. The dollar index rose over 1% for its best week in two months and hit a 19-month high. The yen broke through 160 per dollar for the first time in more than two months. Bitcoin fell below $68,000, a near three-month low, and gold slumped over 4.5% for its worst week in six months.
Equities were mixed. The S&P 500 and Nasdaq failed to hold a rebound, with chip stocks continuing to drag. The Philadelphia Semiconductor Index fell over 3%, with AMD down nearly 9% and Nvidia down 2% on the day and nearly 13% for the week, its worst weekly decline in a year and a half. The Dow eked out a small gain. For the week, all three major indexes still posted their best weekly performance in three months, helped by hopes for US-Iran peace talks early in the week.
Bessent, speaking on CNBC, said the inflation data is essentially noise from an energy supply shock and that the Fed should not sharply reverse policy. He also said recent Treasury auctions were strong and dollar buying was robust, and disclosed that he had received death threats from Iran. Goolsbee countered that services inflation, healthcare costs, and demand from AI data center construction are independent drivers of price pressures that will not fade even if oil prices fall.
Key Takeaways for Investors
- Rate expectations are the dominant driver. With the Fed signaling more work to do, short-term yields and the dollar are likely to stay elevated, pressuring risk assets including crypto and growth stocks.
- Watch the December meeting. A 25-basis-point hike is largely priced in; a 50-basis-point move, while unlikely, would be a significant shock.
- Inflation is broadening. Even if energy prices ease, services and AI-related demand could keep core inflation sticky, limiting the Fed’s ability to pivot.
- Dollar strength has global liquidity implications. A rising dollar tightens conditions for emerging markets and dollar-denominated assets.
- Volatility is likely to persist. The tug-of-war between the Treasury and the Fed adds uncertainty, and markets may remain choppy until the policy path is clearer.
