‘Scorching’ CPI bolsters bets on U.S. rate hikes

By Richard Leong

NEW YORK (Reuters) – U.S. interest rates futures fell on Wednesday as stronger-than-forecast increases in domestic consumer prices in January bolstered bets the Federal Reserve may raise short-term interest rates four times in 2018.

Some Fed officials have insisted that stubbornly low inflation warrants a gradual pace of rate increases, even as the labor market has continued to tightened.

The central bank’s last set of economic projections released in December showed policymakers on average expected three rate increases this year, matching the number of rate hikes in 2017.

The Labor Department said on Wednesday that the consumer price index, the government’s broadest inflation gauge, rose by 0.5 percent last month, more than the 0.3 percent increase forecast by analysts polled by Reuters.

The core CPI, which excludes volatile food and energy prices, grew by 0.3 percent, according to the Labor Department’s rounding method, marking the biggest monthly gain in a year.

Many investors, however, were looking at the core CPI without the rounding effect, which showed a rise of 0.349 percent, the largest monthly increase since March 2005.

JPMorgan (NYSE:) economist Michael Feroli called that increase in the core CPI “scorching” and said it raised the likelihood that Fed policymakers might revise their rate hike guidance at their March meeting to four rate hikes for 2018 from three.

The CPI reading, along with a pickup in wage growth last month, supported the view that inflation is accelerating toward the Fed’s 2 percent goal.

Federal funds futures suggested traders priced in an 83 percent chance the Fed would raise overnight bank borrowing costs by a quarter point to 1.50-1.75 percent at its March 20-21 policy meeting. This was up from 76 percent from late on Tuesday, CME Group’s FedWatch program showed.

Fed funds futures implied traders saw a 25 percent chance that the Fed would raise key overnight borrowing costs four times in 2018, compared with 17 percent late Tuesday, according to FedWatch.

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