Federal Reserve Governor Christopher Waller said on Tuesday that the central bank should consider raising interest rates by 50 basis points in December if October consumer prices came in hot, a test the data met hours later. The Treasury Department then sold $42 billion of 10-year notes at a yield of 5.020%, with demand softer than at recent sales.

For investors in Asia, the message from Washington was that U.S. rates are heading higher, and possibly faster than markets had assumed a week ago. The 2-year Treasury yield, the maturity most sensitive to Fed expectations, rose to 4.73% on Tuesday from 4.56% on Monday, according to Treasury Department data. A wider gap between U.S. and Asian short-term rates tends to pull money toward the dollar and weigh on currencies such as the won and the yen, as Capital Times reported when Richmond Fed President Tom Barkin flagged inflation risks on Monday.

Waller puts a half-point hike on the table

Speaking in London at the Bank of England Watchers Conference before the October consumer price index was released, Waller said he was already leaning toward a 25-basis-point increase at the Fed's December meeting even if inflation improved. He set out a trigger for something bigger. If core CPI rose around 0.3% or more, matching the previous two months, a 50-basis-point move "should be considered," he said. Hiking by only a quarter point in that case would put the Fed's credibility at risk, he added.

The Bureau of Labor Statistics reported later that core prices, which exclude food and energy, rose 0.3% in October, against economists' forecasts of 0.2%, according to Charles Schwab. Headline prices rose 0.4%. Chances of a December hike reached nearly 100% on the CME FedWatch Tool after the data and Waller's remarks, up from 84% on Monday, Schwab said, though a half-point move was not the market's base case.

Waller said he voted to hold rates in October because the Fed's guidance had already led markets to price in tightening. What matters, he argued, is that promised hikes are delivered within a reasonable time, not that they come at consecutive meetings. He called September's inflation data bad, with "no silver lining," citing personal consumption expenditures prices up 3.7% from a year earlier and core PCE up 3.1%. More than 70% of the components of core PCE services prices rose above 3% over 12 months, he said.

He pointed to two pressures with an Asian connection. Prices for high-tech goods tied to the artificial intelligence buildout, much of it supplied by chipmakers and server assemblers in Taiwan and South Korea, had risen at a very high rate in recent months, he said. He also said insurance and ship-to-ship transfers for tankers moving through the Strait of Hormuz were reportedly adding $20 to $30 a barrel to oil prices.

Bowman sounds more cautious

Vice Chair for Supervision Michelle Bowman, speaking later in the day at the Council on Foreign Relations in Washington, gave no rate recommendation for December. She said inflation progress had disappointed and that core PCE inflation likely rose to 3.3% in October, based on the CPI data. Tariffs, energy and AI-related pressures each explained roughly a quarter of above-target core inflation over the year to September, she said.

But Bowman put more weight on the costs of tightening. Financial conditions have tightened because of lower stock prices, higher private interest rates and a stronger dollar, she said, and the benefit of more hikes must be weighed against the strain on housing and other rate-sensitive sectors. She also said AI-related debt is on track to exceed $800 billion this year, and that a shortfall in AI revenue could bring a sharp correction in equity prices for AI firms and higher financing costs.

The Fed's target range stands at 3.75% to 4%, after the committee held it steady in October. Bowman said policymakers will see the October PCE report and the November jobs report before the December meeting.

10-year sale draws thinner demand

The 10-year auction, the second leg of the Treasury's quarterly refunding, cleared at a high yield of 5.020% with a 5% coupon, according to the Bureau of the Fiscal Service. Bidders offered $2.46 for every dollar of notes sold, down from 2.77 at the October reopening and 2.53 at the August new issue, TreasuryDirect data show.

Indirect bidders, a category that includes foreign central banks and other overseas buyers, took about 61% of the competitive amount awarded, compared with about 77% in August. Direct bidders took about 29%, and primary dealers, who must absorb what others do not buy, were left with about 10%.

The yield was still below the 5.300% paid at the October auction, before oil prices fell back from their late-October highs. The 10-year yield ended Tuesday at 4.98%, up from 4.88% a day earlier, Treasury data show, while the 30-year yield rose to 5.35%. Monday's $58 billion sale of 3-year notes cleared at 4.627%, against 4.932% in October. For a broader look at how yields have moved Asian currencies, see Capital Times' analysis of Treasury yields and the dollar.

U.S. bond markets are closed on Wednesday for Veterans Day. The refunding ends with a 30-year bond auction on Thursday, followed by the producer price index on Friday.