Fed Officials Ready to Raise Rates in December but Amount in Doubt

– Some Want More Aggressive Tightening; Others Favor More Gradual Approach

By Steven K. Beckner

(MaceNews) – It is considered all but certain that the Federal Reserve will resume raising interest  rates next month, but with just a few weeks to go before Chair Kevin Warsh convenes the Fed’s policymaking Federal Open Market Committee, comments by Fed officials have left the size of the impending rate hike in doubt.

While some have openly talked about the need for more aggressive monetary tightening, others have sounded hesitant to pick up the pace of rate hikes and have expressed a preference for incrementalism.

Since the FOMC left the federal funds rate unchanged on Oct. 28, a parade of Fed officials has put on a show of support for continuing the battle against inflation ahead of their Dec. 7-8 meeting.

But there hasn’t been unanimity on tactics. Officials differ over the timing and magnitude of further interest rate hikes with a few even floating the idea of a need for a 50 basis point move following a long pause in rate action since the FOMC began its tightening campaign with a modest 25 basis point rate hike on Sept. 16.

Whatever the amount of tightening, a common theme has been that the economy and the labor market are strong enough to withstand an unavoidable assault on inflation.

This week, another dreary set of inflation reports added to the already considerable momentum for a December rate hike, even as strong economic data seemingly gave the Fed permission to tighten credit another notch.

The divergent policy stances were on display in recent days, beginning with Fed Governor Christopher Waller’s assertion Tuesday morning that unfavorable inflation data would cause him to back “more robust action.” He warned that “hiking only 25 basis points would put our credibility at risk.”

Dallas Federal Reserve Bank President Lorie Logan also called for another 50 basis points of tightening on Tuesday, though not necessarily all at one meeting.

By contrast, other policymakers took more of a slow-but-steady approach.

Most notably, New York Federal Reserve Bank President John Williams said Thursday night that more rate increases will be needed to put inflation on a downward course to the Fed’s 2% target. But, as he has done before, the FOMC vice chair showed little sense of urgency by using the somewhat nebulous qualifying phrase “over time” to describe his projected rate path.

Cleveland Fed President Beth Hammack, one of two FOMC members who dissented in favor of raising rates on Oct. 28, refrained from calling for a larger, compensatory rate hike on Dec. 8, but she cautioned the Fed must not let itself get “behind the curve.”

Chicago Fed President Auston Goolsbee seemed eager to move toward greater monetary restraint Monday when he raised the specter of economic “overheating.”

Even Vice Chair for Supervision Michelle Bowman, who has been less inclined to tighten policy than some of her colleagues, conceded Tuesday that progress on reducing inflation has been “disappointing” and may require “more work” to curb “persisting” price pressures. But she said it was wise for the FOMC to forebear last month and “wait until we had a better understanding.”

Others, such as San Francisco Fed President Mary Daly and Philadelphia Fed President Anna Paulson, leaned vocally toward a gradual, patient approach.

After a 9-month stay at 3.50-3.75%, which was preceded by 175 basis points of rate cuts, the FOMC unanimously raised the federal funds rate by 25 basis points on Sept. 16 to a 3.75-4.0% target range. The Committee then split 10-2 to keep the policy rate unchanged on Oct. 28, with two members (Hammack and Gov. Lisa Cook) wanting the FOMC raise it again.

FOMC participants had projected another 25 basis point hike to 4.0-4.25% by the end of 2026 in the September Summary of Economic Projections, and officials have largely reinforced expectations of at least one additional rate hike since the late October meeting.

FOMC participants, excluding Warsh, will publish a fresh set of rate projections and economic forecasts on Dec. 8), and they are eagerly awaited, although the so-called funds rate “dots” often do not prove predictive. 

Warsh has repeatedly opposed the use of “forward guidance” since succeeding Jerome Powell in May, contenting himself on Oct. 28 with saying, “the accumulation of more information will help the Committee determine the policy stance appropriate to ensure a timely return of inflation to the Committee’s 2% goal.”

“(T)here’s no lack of clarity in our purpose at the Fed…..,” Warsh told reporters. “We’ve made clear our readiness to act as circumstances require, and we have shown our willingness to act. The information we receive over the coming period will help us determine where we want policy to be.”

He added, “in this coming period,…we’re going to be able to figure out what’s the appropriate protocol as part of this package that we started to deliver five months ago, to deliver price stability.”

Since then, Fed thinking has been affected by two major data releases. First, last Friday, came the October employment report, which showed non-farm payrolls having risen a much stronger than expected 165,000, coupled with sharp upward revisions to prior months, while the unemployment rate dipped to 4.1%.

Then, this Tuesday, the Labor Department reported that the consumer price index rose 0.4% last month, a tenth more than expected though down from a 0.6% September gain. The core CPI was up 0.3% in October, also worse than expected. (Year-over-year changes were not calculated.

Before the CPI report, Richmond Fed President Tom Barkin offered a nuanced assessment of the balance of risks. Currently, upside inflation risks clearly dominate and make the monetary policy choice clear, he said Monday, but he warned downside risks to the economy could quickly arise if, as a result of the election or for whatever reason, AI investment falls out of favor.

“(T)oday, with demand healthy and inflation stubbornly elevated, the appropriate direction of monetary policy is relatively straightforward,” he told the Greer, S.C. Chamber of Commerce. “However, risks to the demand outlook remain easy to envision. Because of that, it is wise to move policy with care.”

In his fifth district, “resilient demand paired with broad-based cost increases have put upward pressure on prices.” Barkin said, adding that “firms tell us this pressure continues and is leading them to also try to pass on increases that they’ve absorbed to date. They feel they face less resistance to higher prices than they did pre-pandemic….”

But while “the risk lies on the inflation side of our dual mandate.” Barkin said he’s “alert to the elephant in the room” – namely, a potential blow to AI investment: “If it under-delivers, business investment could pull back, stock prices could follow, and so too could asset-fueled consumer spending….”

Goolsbee, who will return to the FOMC voting ranks in 2027, pointed to rising service prices and a threat of economic “overheating” Monday, as he stressed the need to focus policy on reducing inflation.

“We’ve got to come to terms with this cost side and inflation side failure in the mandate,” he told a Leadership Greater Chicago event.

Waller voted with the majority to hold rates steady on Oct. 28, but early Tuesday he not only advocated a resumption of rate hikes in December, he indicated a willingness to do so even more aggressively.

The erstwhile “dove,” speaking just before the release of the October CPI report, said he intended to vote for a 25 basis points on Dec. 8, but was prepared to back “more robust action” if the report came in higher than expected.

A bit later, the Labor Department reported worse than expected consumer price increases. Based on what he said before the report was released, Waller will presumably be pushing for a 50 basis point rate hike on Dec. 8.

He echoed others in saying that, with the labor market “stable”  and near “maximum employment,” inflation is “the focus of my attention.”

Waller, who was making the case for rate cuts earlier this year when he was under consideration to succeed Powell, said he supported holding rates steady in September because “the Committee’s communication about the likely tightening of policy had already led financial markets to price in some tightening.”

“When this communication is clear and credible, what really matters is that those hikes are eventually carried out—it is not necessary, for example, to raise rates at consecutive meetings,” he elaborated. “If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way. So, while the precise timing of the hikes doesn’t matter, ensuring that the promised hikes are implemented in a reasonable period of time does.”

Now, Waller seems eager to move, perhaps aggressively, as he made clear in a speech to a Bank of England Watchers Conference in London shortly before the CPI report.

“While I am hoping for an improvement over September, even if this occurs, I would still support a 25 basis point increase in the FOMC’s policy rate at our December meeting,” he said. “However, if inflation comes in substantially higher than I expect, more robust action by the FOMC may be called for….”

Waller, who described himself as “particularly concerned about the breadth of price increases,” said that if his fears were to be confirmed by the CPI report, he would conclude that “a stronger policy move may be needed. In that case, I believe 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,” he added.

Logan lived up to her hawkish reputation on Tuesday as well, calling for 50 basis points of additional tightening, although she was vague about when.

Speaking after release of the October CPI report, she noted “it was higher than expected” and said she is “concerned that PCE inflation could rise when we receive those data for October in a couple of weeks.”

Inflation is “trending meaningfully higher” than the Fed’s 2% target and is “broader” than energy and tariff-related price increases, she said.

Logan, who joined two other Federal Reserve Bank Presidents in dissenting in favor of raising rates on July 29, declared that “tighter policy will be necessary to appropriately balance the outlook and risks for inflation and employment. And it is important to achieve that balance promptly. The longer above-target inflation persists, the greater the risk that it becomes baked into behavior.”

Logan contended “accommodative monetary policy is adding to inflationary pressures.” To make her point, she cited various estimates showing that the real federal funds rate is “a quarter-percentage-point below the lowest estimate of neutral.” What’s more she said “broad financial conditions are currently providing a tailwind to the economy.”

Although market interest rates have risen, she said this is “more a message that investors believe monetary policy has work to do than an independent headwind for activity.”

Logan warned that “without any monetary policy restraint, inflation will continue to trend above target unless unexpected shocks occur.”

She estimated that “the fed funds target range is at least 50 basis points—half a percentage point—below the level that would create some modest restriction and begin to bring the inflation trend back to target.”

While it was acceptable to skip the October meeting, Logan warned against much further delay in moving to make monetary policy “modestly restrictive.”

“It remains clear to me, given the current outlook, that the FOMC needs to implement at least two more 25-basis-point rate increases,” she said.

“The exact pace of increases could depend on the near-term economic and financial environment. It may be possible to move more rapidly this winter than the FOMC has moved so far this fall,” Logan went on. “After two more increases are in place, it would make sense in my view to pause and examine economic and financial developments to determine what further action may be appropriate.”

Bowman remained more hopeful about inflation than many on Tuesday, saying she “expect(s) that several of the factors currently boosting inflation will abate next year” and forecasting that core PCE inflation will “move closer to 2% next year.”

However, after seeing the October CPI report, Bowman she acknowledged that “progress on lowering inflation has stalled over the past two years or so. Today’s consumer price index suggests that 12-month core PCE inflation likely moved up further to 3.3% in October…”

Bowman admitted “inflation has proven to be more persistent than I had anticipated” and has “disappointed” Fed policymakers in general.

She defended the FOMC’s Oct. 28 decision not to raise rates, saying it was “consistent with my view that further changes in the policy rate should wait until we had a better understanding of how conditions would evolve and how the recent rate increase would influence the underlying trends in the economy. Maintaining the policy stance at the October meeting allowed us to assess the incoming data.”

Bowman stopped short of calling for another rate hike, but said, “Today, I am seeing signs that inflation pressures are persisting, while labor market conditions appear to be firming. This indicates that there is still work to do to bring inflation closer to 2%.”

She said “it is important to ensure that those inflationary pressures do not intensify, further broaden, or become embedded in consumer and business expectations. But today’s consumer price index data suggest that inflation pressures may persist for longer……”

At the same time, Bowman suggested the FOMC should move cautiously, given that financial conditions have already tightened. “Against this backdrop, the benefit of additional policy tightening has to be carefully weighed against its costs for interest-rate-sensitive sectors.”

She also said she wants “to gain greater clarity on the effect of recent market volatility on financial conditions.”

On Thursday, Hammack refrained from calling for an out-sized rate hike on Dec. 8, but still struck a hawkish tone.

Citing “broadening” demand pressures and growth “supportive” financial conditions, she reiterated her “expectation” that “we need to move to a more restrictive stance of policy to help bring inflation back down to our 2% objective.”

Raising rates further is “critically important,” Hammack told Ohio State University business students. “If we don’t, I worry that an inflationary mindset could start taking hold.”

Hammack advocated smaller, gradual rate hikes  — unless “we get behind the curve,” which she implied would then force the FOMC to raise rates by larger amounts.

Kansas City Fed President Jeff Schmid, one of the most hawkish Fed officials, said Thursday that the housing industry is being hit by an array of issues, including rising construction costs, but declined Fed responsibility for the problem.

“Our price-stability mandate requires that we set the policy rate to control economy-wide

inflation rather than favor one sector over others,” he told a housing conference he was hosting in Kansas City. “However, the loans used to acquire land and build housing are often priced on longer term interest rates, which have risen much more than the policy rate that the Fed controls.”

“Much of the recent increase in longer-term interest rates appears to reflect factors beyond monetary policy, such as the extraordinary expansion of investment in artificial intelligence,” Schmid added.

Daly joined the tightening chorus Thursday afternoon, although she suggested the Fed does not need to hurry do what needs to be done to contain inflation.

“My bias is that further tightening will be needed because you just see this consistent pressure on inflation that isn’t simply in the sectors that are most directly affected by tariffs or oil,” she said at the Stanford Institute for Economic Policy Research, noting that the AI boom is also contributing to wage-price pressures.

Daly warned inflation could become more “sticky” to the extent that service prices accelerate. So with the economy and labor markets doing well, she said, “We have to focus on bringing inflation down.”

However, at the same time, she gave no indication she favors a larger December rate hike. Thanks to tighter financial conditions, “we have many many quarters to make policy decisions,” she said.

Williams, who usually mirrors the FOMC mainstream perspective, agreed with the need for increased monetary restraint Thursday evening, but in keeping with previous comments, he did not join the ranks of those calling for more urgent action.

The top Warsh lieutenant summed up his outlook by saying, “The ​economy is strong, labor market continues to strengthen, and inflation is persistent.”

Williams told UC ​Berkeley Alumni, “We’ll need to take actions over time that will ⁠ensure that we get inflation back to our 2% goal in a timely manner and on a sustained ​basis.”

“We still have work to do … to get monetary policy to the right place,” he added. By saying the FOMC needed to act “over time” seemed to suggest a lack of urgency, implying a modest Dec. 8 rate hike, possibly followed by a pause.

The Fed has come under fire from critics who allege that the central bank has contributed greatly to the housing affordability “crisis,” but like Schmid Boston Fed President Susan Collins defended the Fed against such charges Friday morning.

“Of course, monetary policy decisions also matter for housing,” she said after listing other forces impinging on housing costs. “In the near term, the higher interest rates sometimes needed to cool the economy and keep inflation in check can make homes more expensive to buy and to build.”

“But over the longer run, stable prices create predictable economic conditions that are good for housing,” Collins added.