By Samuel Indyk
LONDON (Reuters) -Economists at UK-based banks Barclays (LON:BARC) and NatWest believe the U.S. Federal Reserve could ramp up the pace of its interest-rate rises in March, by delivering a half-point hike, following data on Friday a key gauge of inflation.
NatWest said on Friday it also expects 25-basis point hikes at the May and June meetings, which would take the terminal rate to 5.75%, up from an earlier estimate of 5.25%.
"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% y/y through July, we are raising our Fed funds terminal rate forecast to 5.75%," said NatWest Markets chief U.S. economist Kevin Cummins (NYSE:CMI) in a note on Friday.
Barclays on Monday also said persistent inflationary pressures and economic resilience could lead the Fed to hike rates by 50 basis points next month, especially if the non-farm payrolls data due before the Fed's meeting in March was strong.
"The bond market has moved to "higher for longer," feeding negative reactions in credit," the bank said.
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 labour 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 5.4% by the July meeting, up from 4.50-4.75% currently, according to Refinitiv data. That's up from an estimated peak of 5.2% just two weeks ago.
NatWest and Barclays, as well as a raft of other banks, including Goldman Sachs (NYSE:GS) believe there will be more rate hikes from the Fed.