Traders expect the Federal Reserve to lift its policy rate at least three more times and keeping it high for longer after a government report Friday showed inflation faded less than thought late last year and indeed accelerated in January.
Implied yields on fed funds futures contracts rose after the
Commerce Department reported the personal consumption
expenditures price index, the metric by which the Fed measures
its 2% inflation target, rose 5.4% in January from a year
earlier, with underlying "core" inflation rising a faster than
expected 4.7%. Revisions to prior months showed inflation did
not cool in November and December as much as earlier thought.
Based on those futures prices, the Fed is now seen far more
likely than not to raise its policy target range, currently at
4.5%-4.75%, to a 5.25%-5.5% range by June, with a better than
one in three chance seen that it will lift the rate at least one
more quarter-point notch by July.
And traders now see a year-end policy rate range of
5.25%-5.5% as the most likely outcome, in contrast to months of
betting on at least one rate hike before the end of the year.
Cleveland Fed President Loretta
Mester said
on Friday just before the data release that she was keeping
to her previous forecast, made in December, that rates will need
to rise to about 5.4% to vanquish inflation, but not necessarily
any higher.
Most of her colleagues in December had pointed to 5.1%
as their top expected policy rate. Fed policymakers will publish
fresh forecasts next month, when they next meet to decide on
rates.
(Reporting by Ann Saphir
Editing by Kirsten Donovan, Raissa Kasolowsky and Chizu
Nomiyama)
