Inflation ran hot again in October. Traders now think the Fed is starting a hiking cycle, not ending one.
A 0.4% rise in consumer prices and a 10-year yield back at 5% have made a December rate rise close to certain. The bigger shift is further out, with a second rise by January now an even call.
Future Times4 min read
The odds
Polymarket · live, 03:08 GMTFed raises rates by a quarter point in December
up 10 points over 7d84% when this was published
Now · 86%
Think the market's wrong? Add your forecast and see who's closer.
- Fed Decision in December: 50+ bps increase11%up 10 points
- Fed Decision in December: No change4%down 20 points
- Fed Decision in January: 25 bps increase48%up 23 points
Key points
- Consumer prices rose 0.4% in October and core prices 0.3%, the pace Waller said could justify a half-point rise
- Traders see a December rise as near certain and now split evenly on another in January
- The two-year yield jumped 19 basis points, the clearest sign markets are pricing a longer run of hikes
American consumer prices rose 0.4% in October, the Bureau of Labor Statistics said on Tuesday, against the 0.3% economists had pencilled in. Prices excluding food and energy rose 0.3%, a tenth of a point above forecasts and the third straight month at that pace. Food, which had been flat in September, jumped 0.5%.
By the afternoon the 10-year Treasury yield had climbed back to 5%. The two-year yield, the one most tied to the Fed's next few moves, rose 19 basis points to about 4.74%. That is the more telling number. Investors are no longer pricing one final rise to close the year. They are pricing a run of them.
The number Waller asked for
The timing was pointed. Hours before the release, Fed Governor Christopher Waller told a conference in London that he would still support a quarter-point rise at the 8-9 December meeting. If October's figures resembled the previous two months, "with core CPI inflation around 0.3 percent or even higher", he said, "a 50 basis point hike in the policy rate should be considered at the December meeting."
He went further: "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take." Core inflation came in at exactly the level he described.
The Fed raised its benchmark range to 3.75%-4% on 16 September, its first increase since July 2023, and held it there in October on a 10-2 vote, with two officials wanting to move again. In September, 16 of 18 policymakers expected at least one more rise this year.
The breadth of the report undercuts the idea that this is only an energy problem. Shelter rose 0.3% and accounted for more than 30% of the monthly increase. Restaurant prices climbed 0.5%, groceries 0.4%, car insurance 0.7% and recreation 0.8%. Energy rose only 0.7% after September's 5.2% surge, yet the headline barely slowed.
Because the 2025 government shutdown stopped price collection a year ago, the bureau published no annual rate for October. Investors are judging the trend from monthly readings, and those look stubborn.
From one last hike to a hiking cycle
As of 10 November, Polymarket traders put the chance of a quarter-point rise in December at 84%, up 9 points in a week. The chance of a half-point move has jumped from about 2% a week ago to 11%, almost all of it since Tuesday morning. The chance that the Fed holds rates has collapsed to 3.6%, from 22.5% seven days ago.
Taken together, that leaves almost no room for a pause. Traders put the chance of at least one more rise in 2026 at 95%, broadly in line with futures: CME Group's FedWatch tool showed roughly an 85% chance of a quarter point and 15% for a half point after the data.
The real repricing is in January. Traders now give a further quarter-point rise at the late-January meeting a 50% chance, up 32 points in a day, with an equal chance of no change. A week ago, a pause after December was the strong favourite.
In September most policymakers sketched only one more move this year. The market now treats December as the second step in a sequence of open length. Dallas Fed President Lorie Logan has argued that "it may be possible to move more rapidly this winter than the [FOMC] has moved so far this fall."
Bond traders are leaning the same way. Traders' estimate of the chance that the 10-year yield falls below 4.7% before the end of the year dropped 17 points in a day to 31%.
Why the doves still have a case
The strongest argument against a run of rises is energy. Global oil costs have fallen, and the national average price of petrol slipped below $4 a gallon for the first time in nearly four months. Waller himself said he was "pleased to see energy prices down", though still "quite elevated relative to the start of the year".
If cheaper fuel feeds through to transport and goods in November and December, the core rate could drift back towards 0.2% a month, and a January rise would look like overkill. Used car prices already fell 1.2% in October, and headline inflation did slow from 0.6% to 0.4%. For the market to be wrong, the next two inflation reports would need to show that relief, and the Fed's new projections in December would need to sketch a pause.
What it means for markets, business and policy
Markets A two-year yield rising faster than the 10-year means investors expect rates to rise sooner, not just stay high for longer. That keeps borrowing costs elevated across the curve and supports the dollar against currencies whose central banks are on hold.
Stocks and sectors Growth and small-company shares are the most exposed to higher short-term rates. Housebuilders, commercial property and heavily indebted firms face the steepest rise in financing costs if January follows December.
Business With a 10-year yield at 5%, mortgage and corporate borrowing costs are unlikely to fall before spring. Firms refinancing in early 2027 face tighter terms than the September projections implied.
Policy The December decision is now about size, not direction. A half-point move would signal that the Fed fears losing credibility more than it fears slowing growth, and it would make a January rise more likely, not less.
What to watch
The Fed meets on 8-9 December and publishes new projections; the key number is how many policymakers pencil in further rises for 2027. November's consumer price report arrives on 10 December, the day after the decision, and will shape the late-January meeting. A 10-year yield holding above 5% into December would confirm that bond investors are pricing a longer campaign.
October's report did not force the Fed's hand on December. That was already done. It made January the question.