Fed expected to hike rates in December as inflation approaches 4%

Inflation has risen to 3.7% year-over-year, with extrapolations suggesting it may reach 4%, double the Federal Reserve's 2% target. Fed Chair Kevin Warsh is prioritizing the restoration of institutional credibility, leading to market expectations of a 25 basis point rate hike in December. Fed fund futures price in over 100% probability of this hike, with a 10% chance of a 50 basis point increase. The two-year Treasury yield is trading at 4.8%, implying further hikes. Anna Wong of Bloomberg argues the hike would be a policy mistake but predicts it will occur.

The Fed is simultaneously conducting quasi-quantitative easing by buying T-bills at a rate of $25 billion per month to support bank reserves, creating a mixed signal of tightening rates while expanding the balance sheet. Historical precedents from 2018 and 2022 show the Fed often hikes until credit markets or equities break, with the S&P 500 falling nearly 20% in 2018 and 25% in 2022 before policy reversals. James Lavish argues that the Fed is constrained by fiscal dominance and will not hike aggressively enough to cause a deep recession, while agreeing with Anna Wong that the December hike is a mistake but inevitable. He noted, "We're getting to a point here where the Fed is basically claiming that their hands are tied."