U.S. Inflation Shock Puts Half-Point Fed Hike on the Table; Treasury Prices Plunge

【Financial News, New York = Correspondent Lee Byeong-cheol】  With U.S. inflation rising more strongly than expected, concerns are growing that the Federal Reserve System (Fed) may accelerate the pace of its rate hikes. The possibility that the Fed could take a “big step” and raise its benchmark rate by 0.5 percentage points next month has also been raised, sending U.S. Treasury prices sharply lower and yields soaring. Expectations are spreading in the market that the Fed’s monetary tightening could proceed faster and more forcefully than anticipated.
According to the U.S. Department of Labor’s Bureau of Labor Statistics (BLS) on the 10th local time, the Consumer Price Index (CPI) rose 0.4% in October from the previous month. That was above the market forecast of 0.3%. Although it was down from September’s 0.6% increase, the figure confirmed that inflationary pressure remained strong.
Core CPI, which excludes volatile food and energy prices, rose 0.3% from the previous month. It continued to rise 0.3% for a third consecutive month, starting in August. Housing costs rose 0.3%, while food and energy prices increased 0.5% and 0.7%, respectively.
The higher-than-expected inflation data quickly prompted financial markets to price in the possibility of further Fed rate hikes. In particular, expectations grew that the Federal Open Market Committee (FOMC) could raise the benchmark rate by 0.5 percentage points at its meeting next month. Federal Reserve Governor Christopher J. Waller had previously said that if October core CPI rose 0.3%, the Fed could consider a 0.5-percentage-point rate hike at its December meeting. With the core CPI figure actually reported reaching that level, market concern about a big step intensified.
According to the CME FedWatch Tool at the Chicago Mercantile Exchange (CME), after the October inflation report, the probability of the Fed raising its benchmark rate by 0.5 percentage points in December climbed from about 1% before the release to around 15% intraday. The market, however, still sees a 0.25-percentage-point hike as the baseline scenario.
The U.S. Treasury market was hit hard as expectations of rate hikes strengthened. The yield on the 2-year Treasury, which is sensitive to changes in monetary policy, surged 19.28 basis points (1 basis point = 0.01 percentage points) that day to 4.74%. It was the largest one-day increase since April last year. The 10-year Treasury yield also rose to 4.988%. Because Treasury yields and bond prices move in opposite directions, the sharp rise in yields means bond prices plunged.
The shock to the bond market also spread to stocks. The sharp rise in U.S. Treasury yields fueled concerns about higher corporate borrowing costs and the reduced relative appeal of stocks as investments. That day, the Dow Jones Industrial Average fell 0.30%, the S&P 500 fell 0.38%, and the Nasdaq Composite fell 0.74%.
In the market, not only the direction of Fed rate hikes but also their pace and magnitude are emerging as key factors that will shape financial markets going forward. In particular, observers say that if inflationary pressure does not ease readily, the Fed could pursue more aggressive monetary tightening than expected, further increasing volatility in the Treasury and stock markets.




[email protected] Correspondent Lee Byeong-cheol Reporter