The Marriner S. Eccles Federal Reserve Board Building in Washington, DC
Sarah Silbiger | Reuters
Markets are almost certain that the Federal Reserve will take another step in the pace of its rate hikes next month.
Prices Wednesday morning pointed to a 94.3% chance of a 0.25 percentage point gain at the central bank’s two-day meeting that concludes Feb. 1, according to data from the CME Group. If it stays that way, it would push the Fed’s benchmark rate to a target range of 4.5%-4.75%.
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While the likelihood has changed little since late last week, Wednesday’s economic data helped solidify the idea that after a succession of aggressive hikes — at one point four consecutive hikes of three-quarter points in 2022 — the Fed is poised to take its foot off. the more brakes.
The producer price index fell 0.5% in December, while retail sales fell 1.1%. Both indicate that rate hikes by the Fed are driving down inflation and slowing consumer demand.
“We are changing our call for the February FOMC meeting from a 50 [basis point] to a 25 basis point increase, although we believe markets should maintain some likelihood of a larger increase,” Citigroup economist Andrew Hollenhorst wrote in a note to a client.
“Softer PPI will combine with lower consumer prices and wage inflation to most likely push the Fed towards a 25 bps hike,” he added.
One basis point is 0.01 percentage point.
James Bullard, president of the St. Louis Fed, said Wednesday morning that he would prefer policymakers to stay on a more aggressive path.
The Federal Open Market Committee, which sets the course, where Bullard has not voted this year, approved a 0.5 percentage point increase in December after consecutive moves of 0.75 percentage points.
“Why don’t we go where we need to go, where we think the policy rate should be for the current situation?” Bullard said during a roundtable discussion hosted by The Wall Street Journal. “Once you’re there, you can say, ‘Okay, now we’re just going to act on data.'”
However, Philadelphia Fed President Patrick Harker said last week that he supports a slowdown.
“I expect we’ll raise rates a few more times this year, but I think the days of raising them 75 basis points at a time are definitely over,” Harker, a FOMC voter, said Thursday. “In my view, increases of 25 basis points going forward will be appropriate.”
Traders in the Fed Funds futures market expect the central bank to raise rates to 4.75%-5% by mid-summer and then cut them by half a percentage point by the end of the year.
However, Fed officials estimated in December that they see the rate pass 5% this year and stay there, with no likely cuts until at least 2024.