By Ann Saphir and Howard Schneider
NEW YORK/SAN FRANCISCO, Feb 24 (Reuters) – Expectations that Federal Reserve policymakers will have to raise interest rates and keep them higher for longer than expected rose on Friday after data showed an acceleration in a key indicator of inflation in January.
The Commerce Department reported that the Personal Consumption Expenditures Price Index, the measure by which the Fed measures its 2% inflation target, accelerated to 5.4% a year last month, from 5, 3% revised upwards for December. “Core” inflation rose at an annualized rate of 4.7%, faster than expected, after an upward revision of 4.6% in December.
Following the report, implied yields on fed funds futures showed traders betting firmly on at least three more rate hikes through June, a trajectory that would push up the central bank’s cost of overnight credit. US in the 5.25%-5.50% range, compared to the current level of 4.50% to 4.75%.
The probability of an even higher breakpoint for this type is also rated at 40%, up from 30% before the PCE data was released.
On the other hand, traders largely removed what had been constant bets on Federal Reserve rate cuts towards the end of the year.
Revisions to data from previous months in the Commerce Department report showed that inflation did not subside in November and December as much as expected, and spending in January rose more than expected, even though the savings rate has increased. .
That data, along with other economic readings in recent weeks that suggest the labor market remains strong and wage growth isn’t slowing particularly quickly, could force Fed policymakers to raise their own point of view estimates. appropriate stop for the official interest rate.
It also casts doubt on Fed Chairman Jerome Powell’s assessment earlier this month that the “disinflationary process” had begun, an opinion that seemed to justify the central bank’s decision at its meeting on 31 January to February 1 to decide on a rate of a quarter of a percentage point. hike after a series of bigger hikes in 2022.
“If the Fed had this data at the last meeting, it probably would have gone up 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.
TALK ABOUT THE RECESSION
In December, Fed policymakers predicted 5.1% as the likely highest level for the official interest rate; Goldman and other analysts who commented on Friday’s data believe the central bank’s next set of projections, due out in March, will lift it.
In a statement after the data, Cleveland Fed President Loretta Mester said the central bank should, if at all, get it wrong by raising rates to control inflation. Mester has always been a little tougher than most of her colleagues, and since December has maintained her view that the interest rate should be at 5.4% to be restrictive enough.
Fed Governor Philip Jefferson, speaking at the same conference as Mester at the University of Chicago Booth School of Business in New York, did not provide any estimate of how big he thinks the rates will have to go, but said he believed the central bank acted quickly and forcefully to fight inflation and will be watching the data closely while assessing the future path.
Many analysts believe the data is already forcing the Fed’s hand.
“It looks like the Fed will have to be more aggressive,” said Yelena Shulyatyeva, economist at BNP Paribas. “They are likely to overshoot, in our view, and that ends up causing a recession; the question is more when, rather than if, there will be a recession.” (Reporting by Sinead Carew, Lindsay Dunsmuir and Howard Schneider; Writing by Ann Saphir; Spanish editing by Manuel Farías)