Fed's Waller Backs December Rate Hike Ahead of Key CPI Report

The Federal Reserve isn't done raising rates, and one of its governors just said so out loud. On Tuesday, Fed Governor Christopher Waller said a December hike is likely and floated a bigger one if inflation surprises to the upside.

He said he's "leaning toward" a December increase and would support "more robust action" if inflation readings come in higher than expected, as CNBC's market blog reported. The Fed held rates in October.

His reasoning was about credibility. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take," Waller said, adding that a 50 basis point hike "should be considered" in December.

The timing is pointed. The October consumer price index is due at 8:30 a.m. ET Tuesday, and it's the last major inflation report before the December meeting.

Economists polled by Dow Jones expect headline CPI up 0.3% and core up 0.2%. That would be slower than September's 0.6% and 0.3%, but still not the kind of cooling that lets the Fed relax.

There's a data wrinkle, too. No annual figure will be published for October because the 2025 government shutdown left a gap in the data. Bank of America estimated annual growth at 3.8% for headline and 2.7% for core, both 0.1 percentage point higher than September and far above the Fed's 2% goal.

"Now this stuff with the AI data center build-out is, to my eyes, starting to look more just like old-fashioned demand overheating." — Austan Goolsbee, President, Chicago Fed

Goolsbee's comment, made Monday and reported by CNBC's CPI preview, is the part stock investors should read twice. It links the AI spending boom directly to inflation pressure, which is the same boom that has been driving the market.

The backdrop is strong growth rather than weakness. Third-quarter GDP rose 3.4%, and the Atlanta Fed is tracking 3.5% for the fourth quarter. A hot economy gives the Fed room to hike without worrying about a stall.

Markets have already moved. Futures traders were pricing better than an 80% chance of a quarter-point hike in December before Waller spoke, and Cointelegraph reported odds jumping to 96% after his remarks, with bitcoin slipping toward $74,000.

That matters after Monday's rally, when the Dow gained 1,104 points and the S&P 500 rose 2.35%. The bounce came from falling oil and relief after last week's tech selloff. It didn't come from a friendlier Fed.

Risk runs both ways. A cooler CPI could ease the case for a half-point move and extend the rebound. A hot print could push the 50 basis point scenario from a footnote into the base case, and growth stocks, which are most sensitive to rates, would feel it first.

For your portfolio, a few practical points. Rate-sensitive, debt-heavy names are most exposed if hikes get bigger, including companies financing AI buildouts with borrowed money. Strong balance sheets and real cash flow tend to hold up better.

Policy isn't the only pressure. Public markets have also grown wary that rising rates will make debt unaffordable for companies that need it for costly AI infrastructure, a concern CNBC highlighted in its Anthropic IPO coverage.

Cash and short-term Treasuries also look better when the Fed is still hiking, so it may be time to check whether you're earning a competitive yield on idle money. Be careful about adding aggressively to a rebound before the CPI print.

Watch the CPI print for shelter and services, since that's where Fed officials say price pressure is spreading beyond oil and tariffs. Then watch how Waller's colleagues respond. If more voters echo the 50 basis point language, expect a rougher December.

Bottom line: the Fed's message is that inflation isn't beaten, and the market has only started to price that in.