Fed's Waller says December rate increase could reach half a percentage point

Christopher Waller, a member of the Federal Reserve board of governors, said Tuesday that economic data could lead Waller to support a half-point interest rate increase next month. Waller said a December increase of 50 basis points should be considered if October core consumer prices rose by at least 0.3 percent. Waller warned that an increase of only 25 basis points under those circumstances would jeopardize the Federal Reserve's credibility.

Waller said a quarter-point increase remains Waller's preferred option if economic developments match Waller's expectations, even if October inflation improves from September. The Federal Open Market Committee's next meeting is scheduled for December 8-9. Waller delivered the remarks at the Bank of England Watchers' Conference at King's College London.

The Bureau of Labor Statistics reported Tuesday that consumer prices increased by 0.4 percent between September and October. The bureau reported that core prices increased by 0.3 percent for a third consecutive month, matching the threshold Waller identified. Core prices exclude food and energy costs. The bureau reported a 0.7 percent increase in energy prices. Food prices increased by 0.5 percent, according to the bureau. Electricity prices climbed by 0.9 percent, the largest monthly increase since April, the bureau reported.

FOMC officials raised interest rates by a quarter point in September in an effort to return inflation to the 2 percent target after five and a half years of elevated prices. Waller described economic activity as strong and the labor market as stable on Tuesday. Waller said inflation remained too high and substantially exceeded the FOMC's 2 percent target. Officials left the interest rate range unchanged at 3.75 percent to 4 percent in late October. The CME FedWatch tool showed traders assigning a 90.5 percent probability to a quarter-point increase next month. The tool showed a 9.5 percent probability of a 50-basis-point increase.

US bond yields rose sharply after Waller's Tuesday remarks and the release of the inflation figures. The 10-year Treasury yield exceeded 5 percent during intraday trading for the first time in a week. The 10-year yield was nearly 13 basis points above Monday's close. The 30-year Treasury yield approached 5.38 percent during Tuesday's session, the highest level since October 29. The 30-year yield stood at about 5.35 percent by midafternoon.