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Traders price a December fed rate hike near 90% after October CPI rose 0.4%, as two-year Treasury yields head for their worst week since 2024 before PPI.
- Futures put the chance of a December quarter-point hike near 90%, with a half-point move priced at roughly 9% to 15%.
- October CPI rose 0.4% against a 0.3% forecast, and core prices gained 0.3% for a third straight month.
- Two-year Treasury yields are on course for their sharpest weekly rise since 2024 ahead of Friday's producer price report.
Lead
Markets have moved to price a December fed rate hike as close to certain. Futures tracked by CME Group's FedWatch tool show a probability of about 85% to 91% for a 25-basis-point increase at the December 8-9 meeting, plus a 9% to 15% chance of a 50-basis-point move. A week earlier, traders put the odds of a quarter-point hike at 77%.
The shift followed the October consumer price index, released Tuesday, which showed prices rising 0.4% on the month against a 0.3% forecast. Two-year Treasury yields have climbed to roughly 4.74%, putting the benchmark on track for its worst week since 2024. The producer price index for October, due Friday at 8:30 a.m. ET, is the last major inflation test before the Federal Reserve meets.
How Likely Is a December Fed Rate Hike?
A December increase is now the market's base case, with a quarter-point move priced at close to 90%. The October CPI was the final inflation reading policymakers will see before the meeting. Headline prices followed a 0.6% rise in September. Core prices, which exclude food and energy, rose 0.3% against a 0.2% forecast, the third consecutive month at that pace.
Energy rose 0.7% in October, led by a 1.0% increase in gasoline and a 0.9% rise in electricity. Food climbed 0.5%. Shelter rose 0.3% and accounted for more than 30% of the headline gain. The Bureau of Labor Statistics did not publish an annual CPI rate for October because the prior year's government shutdown left no comparable base-period data.
Why Is a 50-Basis-Point Move Back in Play?
A half-point hike is on the table because Fed Governor Christopher Waller set an explicit trigger and the data met it. In remarks in London on November 10, Waller said a 50-basis-point increase should be considered in December if core CPI printed around 0.3% or higher. Hours later, the BLS reported a core reading of 0.3%.
Waller said that raising rates by only 25 basis points would put the Fed's credibility at risk. Dallas Fed President Lorie Logan said Tuesday that she sees a need for two more quarter-point increases. Together the remarks suggest the debate inside the committee has moved from whether to tighten to how fast. Futures pricing reflects the shift, with the half-point probability rising from near zero before the CPI release to as much as 15% afterward.
Why Are Two-Year Treasury Yields Surging?
Two-year Treasury yields are surging because the maturity tracks expected fed rate changes more closely than any other benchmark. On Tuesday the two-year yield jumped about 17 basis points to 4.73%, its largest one-day increase since April 2025, when tariff announcements rattled bond markets. The weekly climb is now the steepest since 2024.
Longer maturities followed. The 10-year yield rose 13 basis points to 4.99%, within reach of 5%, and the 30-year gained 9 basis points to 5.35%. A $42 billion auction of 10-year notes saw a 10% dealer takedown, the highest since May, a sign that primary dealers absorbed more supply than usual. Equities fell on the CPI release as higher interest rates pressured growth shares and rate-sensitive sectors. Long-duration funds such as the iShares 20+ Year Treasury Bond ETF (TLT) are among the most exposed to a further rise in yields.
Brent crude traded near $91.49 a barrel, down about 1% on the day. That left energy prices a less immediate source of relief for the inflation outlook than the gasoline and electricity gains in the CPI report suggest.
What Does Friday's PPI Report Mean for the Fed?
Friday's producer price index tests whether the pipeline pressure behind October's consumer inflation is still building. Economists expect final demand prices to rise 0.4% on the month and core prices, which exclude food and energy, to gain 0.3%. The yearly rate is forecast at 6.6%, up from 6.3% in September and the largest 12-month increase since December 2022. A base effect drives part of that rise: October 2025 producer prices increased only 0.2% before seasonal adjustment, so even a moderate October 2026 gain lifts the annual figure.
September's producer prices rose 1.3% on the month, which sets a high bar for any sign of cooling. A reading at or below forecast would likely leave the market pricing a quarter-point hike. A hotter core print would strengthen the case for 50 basis points and could push the half-point probability well above its current range. Because the PPI feeds into the producer-side components of the Fed's preferred inflation gauge, the release carries weight beyond its headline.
Strategic Context
Fed officials have signaled that tightening could extend into 2027. Markets have shifted accordingly, pushing out expectations for any return to easing. The two-year yield now sits well above where it traded at the start of the month, and the 10-year is close to a level it last approached in earlier tightening phases. Stronger employment data have reinforced the hawkish repricing.
For borrowers, the shift feeds directly into the cost of credit tied to the benchmark rate. Prime-linked loans and floating-rate debt reprice after each Fed move, so a December increase of 25 or 50 basis points would flow through to household and corporate financing costs within weeks.
Outlook
The December 8-9 meeting is the next decision point. A quarter-point hike is the market's central expectation at about 90%, and a half-point move remains a live alternative. Friday's PPI is the last major inflation print before the meeting. The data will determine whether the two-year yield extends its weekly rise or the front end of the curve stabilizes near 4.7%.
