Half-point Fed hike in March is a coin flip after hot inflation

Money markets ramped up their expectations for the pace of Federal Reserve tightening after the U.S. inflation figures came in hotter than expected, briefly pricing a supersized half-point hike next month as a more than one-in-two chance and fully pricing in a full percentage point of increases by the end of July.

One percentage point by then is equivalent to a 25-basis-point increase at each of the next four policy meetings. The market also briefly priced in fully six standard quarter-point hikes for the year. The yield on the benchmark 10-year note surged after the data to within 2 basis points of the psychological 2% level.

U.S. consumer prices jumped in January by more than expected, representing a bigger hit to Americans’ paychecks as inflation charges ahead at the fastest pace since 1982 and the Federal Reserve prepares to raise interest rates.

The consumer price index climbed 7.5% from a year earlier following a 7% annual gain in December, according to Labor Department data released Thursday. The widely followed inflation gauge rose 0.6% in January from a month earlier, reflecting broad increases that included higher food, electricity, and shelter costs.

Fed speakers were out in force on Wednesday, with Atlanta Fed President Raphael Bostic saying incoming data will show whether 25- or 50-basis-point increases are appropriate, adding that he was leaning toward four rate hikes this year. Cleveland Fed’s Loretta Mester meanwhile said she was less keen on such an outsized move, although she favored tightening next month, a sentiment shared by her San Francisco Fed colleague Mary Daly.

The Fed slashed the upper band of its target funds rate to 0.25% at the onset of the pandemic in 2020, matching the lowest level on record, and has kept it there since to foster an economic recovery.

After months of maintaining that rising consumer prices were transitory, Powell left the door open to increasing rates at every meeting. At a press conference after the latest Federal Open Market Committee meeting, he didn’t rule out the possibility of a 50-basis-point hike.