Fed Likely to Hike Rates Above 5%

By Ann Saphir

(Reuters) – To prevent too-high inflation in an economy that has seen a strong labor market despite nearly a year’s worth of Fed rate increases in 40 years, the U.S. Federal Reserve will likely need to raise the benchmark rate to 5% and maintain it there.

This was Friday’s betting on financial markets after the U.S. Labor Department reported that employers added more then half a million jobs last week, much more than anticipated, and that the unemployment rate dropped to 3.4%. It is the lowest level in over 50 years.

Mary Daly, president of San Francisco Fed also saw it that way.

Fed policymakers projected that rates would be raised to at least 5.1% by December to curb inflation. However, this projection is still valid. “good indicator” Daly shared his thoughts with Fox Business Network regarding where policy is heading.

She added: “I’m prepared to do more than that, if more is needed.”

The view of Daly and the Fed’s policymakers, including Fed Chair Jerome Powell is not new. It is also not surprising considering what Daly called “the” “wow” Strength of January’s job growth.

For markets, however, it’s a turning point.

The Fed earlier this week increased its benchmark rate by a quarter-of-a-percentage-point to 4.5%-4.75%. Powell stated that the labor market is still tight and that he anticipates the Fed to require additional funds. “ongoing” Increases to obtain monetary policy “sufficiently restrictive” We need to create a more balanced employment market and reduce too-high inflation.

Although initially skeptical that the Fed would require more than a quarter-point interest-rate rise in March due to a disinflationary trend, futures traders of interest-rate futures were able to price an additional increase in May after Friday’s employment report.

This would raise the policy rate to 5%-5.255%.

Traders also voiced their expectation for Fed rate reductions after the jobs report. These were priced to start in November instead of September.

Powell stated that he doesn’t expect inflation to fall quickly enough for the Fed to reduce rates this year.

Friday’s Labor Department report revealed a slower pace of growth in average hourly earnings at 4.4%, compared to December’s upwardly revised 4.8%.

“While the Fed welcomes any signs of easing wage pressures, the pace of growth in average hourly earnings is still too strong to help lower inflation,” Ryan Sweet of Oxford Economics wrote the following.

Daly stated Friday that the Fed will be focusing on progress in inflation to drive its policy decisions. The Fed’s preferred gauge for inflation showed that December saw inflation slow down from earlier this year.

Daly warned that it is too early to conclude that inflation has peaked.

“The direction of policy is for additional tightening and in holding that restrictive stance for some time,” She spoke. “We really will have to be in a restrictive stance of policy until we truly understand and believe that inflation will come squarely back down to our 2% target.”

(Reporting by Ann Saphir, with reporting by Ankika Biwas, Caroline Valetkevitch Lindsay Dunsmuir and Lucia Mutikani; Editing done by Raissa Kazolowsky, Chizu Namiyama, Andrea Ricci