Waller's 0.3% Test Met as Core Inflation Holds — Odds of a Half-Point December Hike Jump

Federal Reserve Governor Christopher Waller set a clear test for the central bank's December meeting on Tuesday morning — and within hours, the inflation data met it exactly.

Speaking in London at a conference hosted by King's Business School and the Money Macro and Finance Society, Waller said he was leaning toward a quarter-point increase at the Fed's December 8-9 meeting even if October inflation came in softer than expected. But he added a condition: if core consumer prices rose around 0.3% or higher, "a 50 basis point hike in the policy rate should be considered at the December meeting."

"Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take," Waller said, arguing that the Fed must follow through on the further tightening markets were led to expect after the October meeting.

The Bureau of Labor Statistics released the October consumer price index hours later, and core inflation — which strips out volatile food and energy prices — rose 0.3% for a third consecutive month, against a forecast of 0.2%. The unrounded figure was 0.296%, clearing Waller's bar by four-thousandths of a point. Headline prices rose 0.4%.

Traders moved fast. The odds of a half-point December hike jumped to about 15% from roughly 1.1% before the data, while the odds of a quarter-point move stood at about 84.7%, according to CME FedWatch. The odds of any December hike rose to 96.3% from 76.3%, with a quarter-point increase now seen as all but certain amid a broad bond market selloff.

A half-point increase in December would be the first since December 14, 2022, when the Fed stepped down from four consecutive 75-point increases to a 50-point move. Waller voted to hold rates at the October 28 meeting because markets had already priced in tightening, arguing that what matters after such a signal is delivery. The committee held its target range at 3.75% to 4% by a 10-2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a quarter-point rise at that meeting.

November's consumer price data lands on December 10, the morning after the December meeting ends, so the committee will vote on the October numbers. Dallas Fed President Lorie Logan and Fed Vice Chair for Supervision Michelle Bowman were also scheduled to speak later on Tuesday.