© Reuters. FILE PHOTO: The Federal Reserve Board Building on Constitution Avenue in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo
By Michael S. Derby and Ann Saphir
NEW YORK/SAN FRANCISCO (Reuters) – Expectations that the U.S. Federal Reserve will need to raise interest rates and keep them high for longer than expected rose on Friday after data showed that a key indicator of inflation accelerated last month.
Still, Fed policymakers speaking on Friday did not push for a return to the kind of aggressive action that marked last year’s interest rate hikes, suggesting that central bankers are happy for now. with following a path of gradual adjustment despite signs that inflation is not improving. cooling as expected.
The Commerce Department reported that the personal consumption expenditures price index, the metric by which the Fed measures its 2% inflation target, rose 5.4% last month from a year earlier, up from a upwardly revised annual rate of 5.3% in December.
Core “core” inflation rose 4.7% faster than expected from a year earlier, compared with an upwardly revised pace of 4.6% in December.
The report “is another indication that the momentum of inflation and price pressures are still with us,” Cleveland Fed President Loretta Mester told Reuters on the sidelines of a conference in New York. “It will take more effort from the Fed to get inflation on that sustainable downward path to 2%.”
Even so, Mester, who had wanted a half-point hike at the last Fed meeting, said he couldn’t yet say whether he would support such a big hike at the next Fed meeting.
She is among the minority of Fed policymakers who in December thought they would have to raise the policy rate to 5.4% to stem inflation, while the majority believed 5.1% would be enough. Earlier on Friday she said that she had not reviewed her point of view.
Similarly, none of the other Fed policymakers speaking Friday, including Gov. Christopher Waller and St. Louis Fed President James Bullard, focused on the new inflation data to argue for a stronger Fed response. Boston Fed President Susan Collins said more rate hikes will be needed, but did not specify a particular stopping point.
Implied yields on federal funds futures contracts rose on Friday as traders confirmed expectations for at least three more rate hikes through June, a path that would push the benchmark central bank overnight interest rate higher. EE. Range of 4.50%-4.75%.
Pricing now also offers a 40% chance of an even higher break point for that rate, up from 30% prior to the PCE data release.
And traders largely erased what had been consistent bets on Fed rate cuts towards the end of the year, pricing in a year-end Fed policy price 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.
Overall, economic data in recent weeks has been stronger than expected, with job growth still strong and wage gains exceeding what Fed Governor Phillip Jefferson said on Friday was consistent with a return. timely to inflation of 2%.
Revisions to data from prior months in Friday’s Commerce Department report showed that inflation did not cool off in November and December as much as had been thought, and spending in January rose more than expected even as the savings rate increase.
Altogether, the economic readings may cast doubt on Fed Chairman Jerome Powell’s assessment this month that the “disinflationary process” had begun, a view that appeared to justify the central bank’s decision at its January 31 meeting. to February 2. 1 policy meeting to offer a quarter percentage point rate increase after a series of larger increases 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 news conference would have been very different,” said Gene Goldman, chief investment officer at Cetera Investment. Management.
Goldman said it expects the Fed’s next round of projections, due to be released in March, to indicate 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 (OTC:). “They will probably overshoot, in our view, and that will eventually lead to a recession; the question is more of when, not whether it will be a recession.”