Further Fed hikes expected after data dips hopes of ‘disinflation’

NEW YORK/SAN FRANCISCO, Feb. 24 (Reuters) – Expectations that the US Federal Reserve will have to push interest rates higher and keep them high for longer than previously forecast rose on Friday after data showed a major inflation gauge accelerated last month.

Still, on Friday Fed policymakers did not push for a return to the kind of aggressive action that characterized last year’s rate hikes, suggesting that central bankers are content to stick to a gradually tightening path for now, despite signs that inflation is slowing down. is not at issue. cooling as they had hoped.

The Commerce Department reported that the personal consumption price index, the yardstick by which the Fed measures its 2% inflation target, rose 5.4% year-on-year last month, up from an upwardly revised annual rate of 5.3% in December.

Core underlying inflation rose faster than expected at 4.7% year-on-year, compared to an upwardly revised pace of 4.6% in December.

The report “is another indication that the impetus from inflation and price pressures is still with us,” Cleveland Fed president Loretta Mester told Reuters on the sidelines of a conference in New York. “The Fed will have to put more effort into getting inflation on that sustainable downward path to 2%.”

Still, Mester — who had wanted a half-point hike at the Fed’s last meeting — said she couldn’t yet say whether she would support such a big hike at the Fed’s upcoming meeting.

She is among the minority of Fed policymakers who in December thought they needed to raise the key rate to 5.4% to halt inflation, when most thought 5.1% would be enough. Earlier on Friday, she said she had not revised her opinion.

Similarly, none of the other Fed policymakers who spoke Friday, including usually aggressive Governor Christopher Waller and St. Louis Fed President James Bullard, focused on the new inflation data to argue for a stronger Fed response. Susan Collins, president of the Boston Fed, said more rate hikes will be needed, but did not specify a specific stopping point.

Implied yields on federal funds futures contracts rose Friday as traders bolstered expectations for at least three more rate hikes through June. 4.50%-4.75% range.

Prices now also give about a 40% chance of an even higher stopping point for that rate, compared to about 30% before the release of the PCE data.

And traders largely erased their consistent bets on Fed rate cuts by the end of the year, pricing in a year-end Fed policy rate of 5.26%.

“There is inflationary pressure in the economy, inflation levels are still too high and more will be needed on the monetary policy side to bring inflation down,” said Mester.

Economic data in recent weeks has been generally stronger than expected, with job growth still robust and wage increases above what Fed Governor Phillip Jefferson said Friday was consistent with a timely return to 2% inflation.

Revisions to previous months’ data in Friday’s Commerce Department report showed that inflation did not cool as much in November and December as thought, and that spending rose more than expected in January, even as the savings rate increased.

Taken together, the economic data may cast doubt on Fed Chairman Jerome Powell’s assessment this month that the “disinflation process” had begun, a view that the central bank’s decision during its Feb. justify. 1 policy meeting to deliver a quarter percentage point rate hike after a series of larger hikes in 2022.

“If the Fed had this data at the last meeting, they probably would have raised by 50 (basis points) and the tone of the press conference would have been very different,” said Gene Goldman, chief investment officer at Cetera Investment. Management.

Goldman said he expects the next round of Fed projections, due to be released in March, to indicate that rates will rise and stay there longer than previously thought.

“It looks like the Fed will have to be more aggressive,” said Yelena Shulyatyeva, an economist at BNP Paribas. “They will probably overdo it in our view and that will eventually lead to a recession; the question is more when, not if it will be a recession.”

Reporting by Sinead Carew, Lindsay Dunsmuir, and Howard Schneider; Written by Ann Saphir; Edited by Paul Simao, Andrea Ricci and Will Dunham

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