Chances improve for an interest rate hike in March

Wall Street expectations for the U.S. Federal Reserve to hike its benchmark interest rate soared Wednesday after one inflation barometer showed a spike in prices.

The Bureau of Economic Analysis’ price index of personal consumption expenditures (PCE) jumped 0.4 percent in January, according to the government’s Wednesday report. For the last 12 months, the PCE price index is up 1.9 percent. Excluding volatile food and energy prices, the so-called core rate is 1.7 percent for the last year.

For the first time in years, the PCE index is approaching the central bank’s long-term inflation target of 2 percent.

The Federal Reserve prefers the spending-based PCE index over the better-known consumer price index, another inflation gauge based on a monthly survey of retail prices.

The consumer price gauge rose in January by a seasonally adjusted 0.6 percent, the fastest one-month increase in four years, driven by a jump in gas prices. For the last 12 months, the consumer price index is up 2.5 percent.

Excluding volatile food and energy, so-called core inflation for the 12 months through January was 2.3 percent.

Chance of a rate hike: 2-1 odds

The Chicago Mercantile Exchange’s FedWatch website, which monitors exchange rate futures trading, flipped Wednesday from 2-to-1 odds against a rate hike after the Federal Reserve’s next meeting on March 15 to similar odds in favor of tighter monetary policy.

The Fed hiked its key interest rate in December for only the second time since setting an unprecedented near-zero level at the peak of the 2008 financial crisis. The Federal Funds rate is in a target range of 0.50 percent-0.75 percent.

On February 1, the Fed’s monetary policy committee left its benchmark Federal Funds rate unchanged.

Minutes from the meeting said: “Many participants expressed the view that it might be appropriate to raise the Federal Funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations, or if the risks of overshooting the committee’s maximum-employment and inflation objectives increased.”

In testimony last month in Congress, Fed Chairwoman Janet Yellen said the central bank expects to continue gradually raising interest rates as long as the economy continues to show expected signs of strengthening.

President Donald Trump has vowed to cut taxes and boost infrastructure spending, which would inject fiscal stimulus into the economy. Last year the US economy grew by 1.6 percent, the slowest growth rate since 2011.

Source: Florida Realtors