Goolsbee Calls October CPI 'Borderline Disturbing' as Hike Talk Builds
Core CPI beat for a third straight month, the two year yield jumped 18bps, and December now looks live.
Photo by Robb Miller on Unsplash
Goolsbee called October CPI 'borderline disturbing' as core ran 0.3% again, the two year jumped 18bps and December hike odds firmed.
A hot print, and a Fed that noticed
Core CPI rose 0.3% in October. That's the third straight month it has come in above forecasts, and it landed hours after Governor Christopher Waller told a London audience that a core reading around 0.3% or higher would put a 50 basis point hike on the table for December.
Chicago Fed President Austan Goolsbee picked up the theme Tuesday on PBS NewsHour. "It's another distressing report, borderline disturbing," he said. He added that the Fed has been hoping for progress and isn't getting it. Goolsbee is a voter next year, and he has historically leaned measured, so the language carries weight.
Services is the problem
Goolsbee said the most troubling piece of the report was that services inflation isn't coming down. That matters more than another tick in goods or energy. Services prices track domestic demand and wages, and a lack of progress there suggests the pressure is becoming entrenched rather than fading as one-off shocks unwind.
He had expected some of the forces behind the increase, tariffs and elevated energy costs among them, to have faded by now. They haven't. He also flagged inflation expectations as a key worry. If price pressure persists and expectations drift, he said, the Fed will have to come to terms with it. He did not say whether he favors a hike in December.
The committee is leaning hawkish
Goolsbee wasn't alone Tuesday. Philadelphia Fed President Anna Paulson said further gradual hikes look appropriate, and Vice Chair for Supervision Michelle Bowman said she is shifting her focus toward inflation. Dallas Fed President Lorie Logan still sees the need for at least two more quarter point increases.
The committee raised rates a quarter point in September and held in October. With inflation running near 3.5% against a 2% target, a hold in December is starting to look like the minority view. The meeting is December 8 and 9.
How rates markets responded
The two year yield jumped roughly 18bps on the day, the largest move since April 2020. That is a repricing of the front end, not a drift.
Goldman Sachs now expects 25bp hikes in December and March, adding a third increase to its cycle forecast. It wants a strong January inflation report to make that hike the path of least resistance, and it expects most policymakers to signal a third hike in the December dot plot. Oil is part of the story. The Middle East escalation the bank flagged as a risk in late October has fed into the inflation data, and crude was bid again Wednesday on reports of mines in the Strait of Hormuz.
What it means for equities and what to watch
A jump of that size in short yields pressures rate sensitive groups first, and gold and growth multiples feel it next. Check the [Sector Rotation dashboard](/sector) for whether money is leaving long duration names or just pausing.
The next hard data point is the December dot plot and the January CPI report. Before that, watch whether the two year holds its 18bp gain. If it gives back most of the move without new inflation data, Tuesday was a positioning flush. If it holds, the market is pricing the hikes Goldman, Waller and Logan are describing.