The Federal Reserve will likely need to raise interest rates another half-percentage point to bring inflation under control. Officials are weighing whether to do it all at once or in smaller steps.
Tuesday's hotter-than-expected inflation report added urgency to that decision. Fed governor Christopher Waller has raised the possibility of a half-point hike in December, while other policymakers favor smaller increases to cool inflation without unnecessarily slowing the economy.
Dallas Fed President Lorie Logan said Tuesday that the central bank needs to raise rates by at least another half-percentage point to begin restraining economic activity. She favors two quarter-point increases, followed by a pause to assess their effects, but said it may be possible to move more quickly this winter.
Waller, meanwhile, said before Tuesday's inflation report that he would consider a half-point increase in December if core consumer prices rose by 0.3% or more in October. The Bureau of Labor Statistics reported that core prices rose by exactly that amount.
A half-point hike would be a large move for a central bank that has been proceeding cautiously. The Fed's benchmark interest rate currently stands at a range of 3.75%-4%, following a quarter-point increase in September and a decision to hold rates steady in October.
The pressure to raise rates comes from an economy that has continued to grow even as inflation has remained above the Fed's 2% target for nearly six years.
Gross domestic product grew at a 3.4% annual rate in the third quarter, and unemployment fell to 4.1% in October. Consumer spending remains solid and businesses are investing money in artificial intelligence infrastructure.
Inflation has also moved beyond the energy shock that drove prices higher earlier this year. Logan pointed to increases in the cost of medical care, child-care, restaurants and hotels, which are less directly affected by tariffs or energy prices. Prices for core services excluding housing and transportation rose 3.2% over the year through September.
Logan suggested on Tuesday that the Fed would need to raise rates at least another half-point just to make monetary policy "modestly restrictive."
Logan also warned that leaving inflation elevated for too long could make it more difficult to bring down. She described a conversation with a manufacturing executive who was considering raising wages next year to compensate employees for higher prices in 2026.
Such increases could help workers whose pay has fallen behind inflation. But if they became widespread, the Fed might need to slow the economy further to prevent higher labor costs from feeding into prices.
"The longer above-target inflation persists, the greater the risk that it becomes baked into behavior," Logan said.
Other policymakers have also argued that the Fed needs to tighten monetary policy, though they have generally preferred smaller increases.
Cleveland Fed President Beth Hammack said last week that she expects rates will need to reach a restrictive level to bring inflation back to target. She favors more frequent, smaller adjustments to avoid unnecessary disruption to households, businesses and financial markets.
St. Louis Fed President Alberto Musalem made a similar case late last month. He argued that moving sooner in smaller steps would be less costly than waiting until the Fed was forced to make larger, abrupt increases.
Both officials see a risk in delaying. Smaller increases may be easier for the economy to absorb, but that approach works best when policymakers begin tightening before inflation becomes more deeply entrenched.
Logan, who voted in favor of a rate pause in October, said on Tuesday that if investors understand where the Fed intends to take rates, the timing of individual increases should have relatively little effect on longer-term borrowing costs.
Waller offered a similar defense of the October decision. He argued that the Fed's communication about future increases had already pushed market interest rates higher, making it less important to raise rates at every meeting.
But he said that the Fed will eventually need to deliver those increases. Otherwise, market expectations would reverse and borrowing costs could fall, loosening financial conditions while inflation remains too high.
He also said that raising rates by only a quarter-point in December, should inflation remain elevated, could put the Fed's credibility at risk.
"Waller is all but admitting they should have hiked," said Tom Graff, chief investment officer at financial advisory firm Facet.
Graff said large increases have traditionally been associated with a Fed that believes it has fallen behind inflation.
"It isn't a good look at all," he said.
Other strategists argued that the latest inflation report doesn't justify such a large increase.
Tuesday's figures make a December hike look all but certain, but don't settle the case for a half-point move, said Seema Shah, chief global strategist at Principal Asset Management.
"An outsized move should require evidence that inflation is accelerating decisively, expectations are becoming unanchored or the economy is overheating," Shah said. "We are not there yet."
Logan also pointed to longer-term inflation expectations that remain near the Fed's target, suggesting that the public still thinks policymakers will bring inflation under control.
That gives the Fed some room to raise rates gradually. But officials who favor smaller increases also want to avoid waiting so long that larger moves become unavoidable.
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