By Michael S. Derby and Ann Sapphire
NEW YORK/SAN FRANCISCO (Reuters) – Expectations that the Federal Reserve will have to push interest rates higher and hold them for longer than previously forecast rose on Friday after data showed a key indicator of inflation had accelerated over the past month.
Despite this, Fed policymakers on Friday did not push for a return to the aggressive measures that characterized last year’s rate hikes, suggesting central bankers are comfortable with it for now, despite signs that inflation is not. sticking to a gradual tightening path cooling as they had hoped.
The Commerce Department reported that the personal consumption spending price index, the metric by which the Fed measures its 2% inflation target, rose 5.4% year-on-year last month, up from an upwardly revised annual pace of 5, 3% in December.
Underlying “core” inflation rose faster-than-expected at 4.7% yoy, compared with an upwardly revised pace of 4.6% in December.
The report “is another indication that the momentum of inflation and price pressures is still with us,” Cleveland Fed President Loretta Mester told Reuters on the sidelines of a conference in New York. “It will take more effort on the part of the Fed to bring inflation to 2% on this sustained downward path.”
Still, Mester — who had called for a half-point hike at the last Fed meeting — said she couldn’t yet say if she would support such a big hike at the upcoming Fed meeting.
She is among the minority of Fed policymakers who in December thought they needed to raise interest rates to 5.4% to stem inflation, while most believed 5.1% would be enough. On Friday she said she had not revised her view.
Similarly, none of the other Fed policymakers who spoke on Friday, including the normally dovish Governor Christopher Waller and St. Louis Fed Chairman James Bullard, focused on the new inflation data to call for a more forceful response from the Fed to plead Fed. Boston Fed President Susan Collins said more rate hikes were needed but gave no specific stopping point.
Implied yields on Federal Funds futures contracts rose on Friday, as traders firmed expectations for at least three more rate hikes through June, a path that has taken the Federal Reserve’s benchmark overnight interest rate from the current 5.25% to 5.25% range .50% would press range from 4.50% to 4.75%.
Pricing is also now showing about a 40% chance of an even higher breakpoint for this price, up from about 30% before the PCE data was released.
And traders largely extinguished their persistent bets on Fed rate cuts later in the year by pricing in a year-end Fed interest rate of 5.26%.
“There are inflationary pressures in the economy, the level of inflation is still too high and it will take more on the monetary policy side to bring inflation down,” Mester said.
Economic data over the past few weeks has been generally stronger than expected, with job growth still robust and wage increases ahead of what Fed Governor Phillip Jefferson said on Friday, 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 off as much as had been thought in November and December, and spending rose more than expected in January, although the savings rate rose.
All in all, the economic data could cast doubt on Fed Chair Jerome Powell’s assessment this month that the “disinflationary process” has begun, a view that supported the central bank’s decision at its January 31-February 2 meeting seemed to justify. 1 policy meeting to deliver a quarter-point rate hike in 2022 after a series of larger rate hikes.
“If the Fed had had that data at the last meeting, it probably would have raised 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 forecasts to be released in March to signal rates will rise and stay there longer than previously thought.
“It looks like the Fed needs to be more aggressive,” said Yelena Shulyatyeva, economist at BNP Paribas. “In our view, they’re likely to overdo it, and that will eventually lead to a recession; the question is when, not if, there will be a recession.”
(Reporting by Sinead Carew, Lindsay Dunsmuir, and Howard Schneider; Writing by Ann Saphir; Editing by Paul Simao, Andrea Ricci, and Will Dunham)
