Stubborn inflation raises the prospect of more aggressive rate hikes from the Federal Reserve

• That would present the Fed with a more difficult balancing act: raising rates enough to contain inflation without needlessly harming the economy.

What they say: “We have a real inflation problem that’s growing — and we’re going to have to deal with it,” Chicago Fed President Austan Goolsbee said late Tuesday, calling the inflation data “bordering on worrying.”

Driving the news: Treasury yields are rising after Tuesday’s inflation report and hawkish comments from Fed officials, including Gov. Christopher Waller, who raised the prospect of a very significant rate hike next month.

• Short-term yields have risen more sharply than long-term yields, a sign that investors expect the Fed will have to raise rates more aggressively than expected.
• The yield on two-year Treasury notes continues to rise after jumping 17 basis points on Tuesday, the biggest one-day rise since April 2025 – when markets were reeling from “Liberation Day” tariffs.
• The yield on the 10-year Treasury note jumped about 8 basis points, bringing it back above 5%.
• Financial markets view a December rate hike as virtually certain, according to CME FedWatch. Expectations for next year are on the rise, with traders now predicting two more quarter-point hikes between now and June.

The big picture: Measures intended to eliminate unusually large price swings suggest that underlying inflationary pressures are accelerating.

• The Cleveland Fed’s truncated average consumer price index, which filters out unusually large price swings to give a clearer picture of underlying inflation, rose 0.4% in October, the largest monthly increase since May.
• The Atlanta Fed’s sticky-price CPI, which tracks generally changing prices, slowly accelerated to an annualized pace of 4.7% in October, its fastest since February 2025.
• More than three-quarters of the consumer price basket saw prices increase at an annualized rate of more than 2% in October, the largest share since August 2022, Charles Schwab’s head of macro research, Kevin Gordon, published on X.

Yes, but: The Fed may have reason to act cautiously, even amid stubborn inflation.

• Rising bond yields and the sell-off in tech stocks (reignited again by the departure of Nvidia CEO Jensen Huang) are already tightening financial conditions – which could contribute in part to rising interest rates.
• Fed Governor Michelle Bowman said in a speech that falling stock prices, rising borrowing costs and a stronger dollar could weigh on economic growth, particularly in sectors already struggling with high interest rates.
• Cleveland Fed President Beth Hammack, who disagreed with the decision to keep rates steady last month, said she remained supportive of a more gradual approach to raising rates. “It’s less disruptive to the economy as a whole than making sharper, more aggressive moves,” she said Thursday morning.

What to watch: Some of the forces pushing up inflation this year – including tariffs and the war in Iran – are expected to be temporary. But the risk that they will prove more persistent continues to resurface.

• President Trump threatened Thursday morning to double tariffs on Mexican imports unless the country stops a caravan of migrants from reaching the U.S. border.
• Trump also said the United States did not need a deal with Iran, raising new questions about how quickly the conflict (and disruption to global energy supplies) could end.