LONDON – British bank NatWest said it now expects the Federal Reserve to raise interest rates by 50 basis points at its March meeting following Friday’s personal consumption expenditures (PCE) data for January.
NatWest also expects 25-basis point hikes at the May and June meetings, which would take the terminal rate to 5.75 percent, up from their earlier estimate of 5.25 percent.
“Given (Friday’s) inflation backdrop, and the fact our monthly core inflation profile now shows the Fed’s preferred core PCE deflator holds above 4 percent year-on-year through July, we are raising our Fed funds terminal rate forecast to 5.75 percent,” said NatWest Markets chief U.S. economist Kevin Cummins in a note on Friday.
Economic data had indicated inflation was starting to slow, prompting the Fed to downshift to a quarter-point rate rise at its Jan. 31-Feb.1 policy meeting, but the numbers since then may have thrown into doubt Fed chair Powell’s view that the “disinflationary process” has begun.
Strong labor market data, sticky consumer prices, rising producer prices and now accelerating PCE price index – the Fed’s preferred measure of inflation – have prompted markets to price in additional rate hikes and price out rate cuts at the end of the year.
Money markets now price in a terminal Fed funds rate of around 5.4percent by the Fed’s July meeting, according to Refinitiv data. That’s up from 5.2 percent just two weeks ago.
NatWest follows other major banks in raising their expectation for more rate hikes from the Fed, with Goldman Sachs among those to have tacked on additional rate rises this year.