Hotter U.S. Inflation Raises Odds of Bigger Fed Hike

U.S. consumer prices rose more than expected in October, adding to market expectations that the Federal Reserve could raise interest rates by half a percentage point in December. Bitcoin, Ether and Solana fell after the report.

The Consumer Price Index increased 0.4% from September, exceeding economists’ forecast of 0.3%, according to the Bureau of Labor Statistics. The monthly increase slowed from 0.6% in September. Core CPI, which excludes food and energy prices, rose 0.3%, compared with expectations for a 0.2% increase.

The report came hours after Federal Reserve Governor Christopher Waller said in London that another core inflation reading of 0.3% or higher could lead policymakers to consider a larger rate increase in December. “In that case, I believe a 50-basis-point hike in the policy rate should be considered at the December meeting,” Waller said. “Hiking only 25 basis points would put our credibility at risk.”

The Fed holds its benchmark interest rate at 3.75% to 4%. It raised the rate by a quarter percentage point in September and left it unchanged in October. Markets had priced in a quarter-point increase for December before the inflation report and Waller’s comments raised expectations for a larger hike.

Traders were pricing in about 27 basis points of tightening for the December meeting after the report, according to Jeff Anderson, head of the U.S. division at crypto trading firm STS Digital. “The prospect of another rate hike is becoming increasingly difficult to ignore,” Anderson said.

CME FedWatch data at 16:28 UTC showed an 88.3% probability of a quarter-point increase in December and an 11.7% probability of a half-point increase.

Higher rates can increase borrowing costs for investors who use leverage and reduce demand for riskier assets such as cryptocurrencies. Total crypto market capitalization fell 1.6% over 24 hours to $2.57 trillion, according to CoinGecko. Bitcoin traded near $73,274, down 2%, while Ether fell almost 5% to about $2,028 and Solana dropped 5.6% to $82.

Adam Haeems, head of asset management at Tesseract Group, said higher borrowing costs could reduce returns from crypto lending and other strategies. “Carry strategies earn the gap between what their assets yield and what they pay to borrow, so they are squeezed when borrowing costs rise relative to that yield,” Haeems said.

The rate paid to lenders supplying USDC on Aave’s main market ranged from about 3.2% to 7% over the previous two weeks, Haeems said. Three-month U.S. Treasury yields remained close to 4.2% during that period.

The inflation report followed U.S. midterm elections in which Democrats won control of both chambers of Congress. Anderson said pressure from a Democratic-controlled Congress to reduce inflation could add to expectations for higher rates. Congress does not set Fed interest rates, but lawmakers can influence economic policy and cryptocurrency regulation. The CLARITY Act, which would establish rules for digital assets in the United States, has been stalled since January because of disagreements between Democrats and Republicans.

Reviewed and fact-checked by Alex Panasenko on November 10.