Fed's loudest hawk ramps up odds for monster US rate hike after hot inflation data

St Louis Fed president James Bullard, who is a voter on the Fed's rate-setting committee this year, said he has become more hawkish in the light of inflation readings. PHOTO: REUTERS

NEW YORK (REUTERS) - Federal funds rate futures on Thursday (Feb 10) have boosted the chances of a half percentage-point tightening by the Federal Reserve at next month's meeting after hawkish comments from St Louis Fed president James Bullard and following hotter-than-expected United States consumer prices data for January.

Rate futures showed a 62 per cent chance that the Fed will raise interest rates by 50 basis points in March following Mr Bullard's remarks, from a 30 per cent chance late on Wednesday. For the year, futures have priced in rates rising by 164 basis points.

Other metrics such as the CME FedWatch tool showed a 95 per cent probability of a 50 basis point hike in March.

Mr Bullard, a voter on the Fed's rate-setting committee this year, told Bloomberg on Thursday he has become "dramatically" more hawkish in the light of the hottest inflation reading in nearly 40 years. He now wants a full percentage point of interest rate hikes over the next three US central bank policy meetings.

The US consumer price index (CPI) gained 0.6 per cent last month after increasing 0.6 per cent last December. In the 12 months through January, the CPI jumped 7.5 per cent, the biggest year-on-year increase since February 1982. Economists had forecast a 7.3 per cent increase.

Mr Bullard in his comments said he did not think such a move would be a "shock and awe" approach but rather a "sensible response" to the unexpected inflation shock. Some analysts, however, believe the Fed will maintain a gradual approach in tightening monetary policy despite higher-than-expected inflation.

"We all expected an acceleration here... is 7.5 per cent to 7.3 per cent the difference between a 25 and a 50 (basis point hike)? No," said Mr Tom Porcelli, chief US economist, at RBC Capital Markets in New York.

"I sincerely hope that the Fed's reaction function is not that sensitive to this kind of miss. Because the reality is we've had firm inflation now for months.

In a blog, ActionEconomics noted that Mr Bullard has a "very hawkish reputation and has often been on the fringe", adding it would monitor further comments from other Fed officials.

Barclays in a research note on Thursday said it has revised its Fed hike forecast this year to five rate increases from three.

The bank added that its new policy forecast implied an end to the tightening cycle in mid-2023, with a terminal target range for the fed funds rate of 1.75 per cent to 2 per cent. That was 25 basis points higher and six months sooner, Barclays said.

The fed funds rate has been near zero since March 2020, when the Fed slashed rates to cushion the economy from the Covid-19 pandemic

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