Expectations for a larger Federal Reserve interest-rate increase in December rose sharply Tuesday after U.S. inflation data showed continued underlying price pressure. The possibility of a half-point hike, previously viewed as a more remote scenario, gained attention as policymakers left the door open to a faster pace of tightening and markets reassessed the outlook for U.S. monetary policy.

Core Inflation Remains Persistent

The Consumer Price Index increased 0.4% month over month in October, slowing from a 0.6% rise in September as energy-related inflation moderated. However, the measure excluding food and energy increased 0.3% for the third consecutive month, pointing to continued persistence in underlying inflation.

The sustained pace of core inflation is significant for the Federal Reserve because it provides a broader indication of price pressures that can be less affected by volatile energy and food markets. The latest data also showed signs that inflationary pressures were becoming more widespread across the economy, complicating the central bank’s efforts to bring inflation lower.

Markets Reprice December Fed Expectations

Following the report, financial markets increased the probability assigned to a 50-basis-point rate increase at the Fed’s December meeting. By midmorning, the odds of such a move had approached 15%, a notable shift in expectations even though a half-point increase remained a minority scenario.

The move reflects the sensitivity of interest-rate markets to changes in inflation expectations. A larger rate increase would represent a faster pace of monetary tightening and could have broader implications for borrowing costs, corporate financing conditions and valuations across global financial markets.

Treasury Yields React to Inflation Surprise

The Treasury market provided a clear indication of the change in expectations. The two-year Treasury yield recorded its largest increase since early April 2025, reflecting the fact that shorter-dated government bonds are particularly sensitive to expectations for Federal Reserve policy.

Higher short-term yields can also influence the U.S. dollar and international capital flows. For investors in Israel and other global markets, changes in U.S. rate expectations can affect currency valuations, financing costs and the relative attractiveness of dollar-denominated assets.

Fed Faces a More Complicated Policy Balance

The inflation figures create a more difficult policy environment for Fed officials. Persistent core price growth increases the pressure to maintain a restrictive stance, while a faster pace of rate increases could also place additional pressure on economic activity and financial conditions.

The significance of the latest report therefore extends beyond the December meeting. If inflation continues to remain elevated, policymakers may need to reassess the pace and duration of restrictive policy rather than assuming that price pressures will naturally moderate.

Going forward, markets will focus on additional inflation and labor-market indicators as well as comments from Fed officials for evidence of whether the possibility of a larger December rate hike is becoming a more established policy scenario. The evolution of Treasury yields, the dollar and broader financial conditions will provide important signals about how investors are incorporating the renewed inflation risk into global asset prices.