Odds of 50-basis-point Fed rate hike rise after Powell testimony

Fed Chair Jerome Powell speaks at The Economic Club of Washington
U.S. Federal Reserve Chair Jerome Powell speaks to David Rubenstein (not pictured) during a meeting of The Economic Club of Washington, at the Renaissance Hotel in Washington, D.C., U.S., February 7, 2023. REUTERS/Amanda Andrade-Rhoades/File Photo

March 7 (Reuters) - Traders of futures tied to the Federal Reserve's policy rate were pricing in a half-percentage-point hike in interest rates at the U.S. central bank's March 21-22 policy meeting after Fed Chair Jerome Powell said on Tuesday that continued strong inflation data could require tougher measures.

Implied yields on fed funds futures contracts fell, pointing to a 48% probability that the central bank will lift its benchmark overnight interest rate to the 5.00%-5.25% range on March 22, from the current 4.50%-4.75% range, according to CME Group's FedWatch tool. That was up from the 30% chance seen before Powell's testimony before the Senate Banking Committee.

Futures briefly showed more than a 50% chance of a 50-basis-point (bp) hike immediately after Powell's remarks.

The futures contracts pricing also points to firming expectations for the policy rate to rise to a 5.25%-5.50% range by June.

"A 50-bp hike in the next meeting is possible, but it is going to be dependent on the payrolls not slowing down and CPI (Consumer Price Index) numbers showing that the disinflation progress we've made is stalling," said Scott Ladner, chief investment officer at Horizon Investments.

With the next policy meeting two weeks away, Friday's U.S. employment report for February along with an inflation report next week will be crucial in determining the pace of upcoming rate increases.

Powell's testimony on Tuesday marked a stark acknowledgement that a "disinflationary process" he spoke of repeatedly in a Feb. 1 news conference may not be so smooth.

Reporting by Ann Saphir and Gertrude Chavez-Dreyfuss in New York; Additional reporting by Shristi Achar in Bengalaru; Editing by Kirsten Donovan, Raissa Kasolowsky and Paul Simao

Our Standards: The Thomson Reuters Trust Principles.