Traders bet the Fed will grow, but Mester says not so fast

Traders bet the Fed will grow, but Mester says not so fast

© Reuters. FILE PHOTO: Eagle on Top of US Federal Reserve Facade in Washington, July 31, 2013 REUTERS / Jonathan Ernst / File Photo

Author: Ann Saphir

(Reuters) – With expectations of a half percentage point rate increase at the May Federal Reserve meeting now locked, traders bet on Friday that the central bank would rise even more in the coming months, but one Fed policymaker refused, saying a “more methodical” approach was appropriate even in the case of high inflation.

“You don’t have to go there right now,” Cleveland Fed President Loretta Mester told CNBC, referring to the possibility of increasing the rate by 75 basis points. Traders are now setting prices in two such interest rate increases, at Fed meetings in June and July.

Coming from Mester, one of the Fed’s hawker policymakers and a supporter of using a half-point increase to bring inflation down faster, it was a significant attempt to quell market panic on a day when U.S. stock indexes fell.

“Let’s be on this methodical, not overly aggressive path,” Mester told CNBC in probably the last public series of comments by Fed policymakers ahead of their meeting in May.

Fed Chairman Jerome Powell on Thursday gave a “go” sign to a half-point increase and hinted that he would be open to the “initial burden” of the US Federal Reserve’s withdrawal from super-easy monetary policy.

These remarks solidified retailers’ bets on short-term borrowing costs to rise to 0.75% -1% at the Fed’s May 3-4 meeting, and forced them to pile up again in anticipation of larger increases in June and July. .

At the close of the market on Friday, after Mester spoke, futures contracts related to the Fed interest rate signaled more than 80% chance of another 1.5 percentage points increase in the rate of Fed funds, to the range of 2% -2.25% , until the end of the Fed Meeting from 26 to 27 July.

Some economists have also recently cited increased policy tightening.

Jefferies chief economist Aneta Markowska said on Friday that she expects the Fed to use a series of half-point increases to raise rates to 2.25% -2.5% by September, a more aggressive path than previously expected.

Nomura Research analysts, who now see the Fed achieve a 0.75 percentage point increase at each of the Fed’s meetings in June and July, said Friday that market bets could help solidify that real outcome.

“Stronger (market) prices for such a move would likely ease the way for the FOMC and participants could probably quickly reach a consensus on such an action,” they wrote in a note released early Friday.

The Fed raised its reference interest rate by a quarter of a percentage point last month in its first increase in two years from near-zero reference interest rates, although “many, many” Fed policymakers thought higher rate increases would be appropriate, Powell said. Thursday.

“50 basis points will be on the table for the May meeting,” Powell said. “I also think there is something in the idea of ​​front-end loading” removal accommodation, he added.

In March, the Fed raised its target range for the rate on federal funds to 0.25% -0.5%, from a range of 0% -0.25% in the previous two years.

In addition to a sense of urgency, even doveled Fed policymakers like San Francisco Fed President Mary Daly and Chicago Fed Chief Charles Evans this week embraced the idea of ​​a half-point increase in May and raising interest rates to a “neutral” level. by the end of the year.

A majority in the US Federal Reserve says that level is probably between 2.25% -2.5% in the long run.

But with inflation so high – consumer prices rose 8.5% last month, well above the Fed’s 2% target – some observers say interest rates will have to rise even higher to be “real” the cost of borrowing was high enough to start biting into economic activity.

Daly told reporters earlier this week that she believes 2.25% -2.5% is still a “reasonable” estimate for neutral, but noted that policymakers will not know until rates approach that level and be able to observe what is happening in economics.

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