By Ann Saphir and Howard Schneider

NEW YORK/SAN FRANCISCO (Reuters) -Expectations that Federal Reserve policymakers might want to push rates of interest greater and preserve them elevated longer than beforehand projected rose on Friday after knowledge confirmed an acceleration in a key inflation gauge in January.

The Commerce Division reported that the Private Consumption Expenditures value index, the metric by which the Fed measures its 2% inflation goal, accelerated to five.4% on an annual foundation final month, from an upwardly revised 5.3% in December. Underlying “core” inflation climbed at a faster-than-expected 4.7% annualized tempo, in comparison with an upwardly revised 4.6% in December.

After the report, implied yields on federal funds futures contracts confirmed merchants firmly pricing in no less than three extra fee hikes by means of June, a path that will push the U.S. central financial institution’s benchmark in a single day rate of interest to the 5.25%-5.50% vary, from the present 4.50%-4.75% vary.

Pricing additionally places a couple of 40% probability of an excellent greater stopping level for that fee, up from about 30% previous to the discharge of the PCE knowledge.

And merchants additionally largely erased what had been constant bets on Fed fee cuts in the direction of the tip of the 12 months.

Revisions to knowledge from prior months within the Commerce Division report confirmed inflation didn’t cool in November and December as a lot as had been thought, and spending in January rose greater than anticipated even because the financial savings fee elevated.

That knowledge, together with different financial readings in current weeks suggesting the labor market stays robust and wage progress shouldn’t be cooling significantly quick, might drive Fed policymakers to raise their very own estimates for an applicable stopping level for the coverage fee.

It additionally throws doubt on Fed Chair Jerome Powell’s evaluation early this month that the “disinflationary course of” had begun, a view that appeared to justify the central financial institution’s resolution at its Jan. 31-Feb. 1 coverage assembly to ship a quarter-percentage-point fee enhance after a string of larger hikes in 2022.

“If the Fed had this knowledge on the final assembly, they most likely would’ve raised by 50 (foundation factors) and the tone from the press convention would’ve been quite a bit totally different,” mentioned Gene Goldman, chief funding officer at Cetera Funding Administration.

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In December, Fed policymakers projected 5.1% because the likeliest high-water mark for the coverage fee; Goldman and others commenting after Friday’s knowledge suppose the following spherical of Fed projections, to be printed in March, will push it greater.

In remarks launched after the info, Cleveland Fed President Loretta Mester mentioned the central financial institution ought to, if something, err on the facet of overshooting on fee hikes with a purpose to get inflation underneath management. She has constantly been a bit extra hawkish than most of her colleagues, and has caught to her view since December that the coverage fee might want to go to five.4% to be sufficiently restrictive.

Fed Governor Philip Jefferson, who spoke on the similar College of Chicago Sales space College of Enterprise convention in New York as Mester, didn’t present any estimate of the place he thought charges might want to go, however he did say he believes the central financial institution has to date acted promptly and forcefully to deal with inflation, and can preserve an in depth eye on the info because it calibrates the long run path of charges.

Many analysts consider the info is already forcing the Fed’s hand.

“It seems to be just like the Fed must be extra aggressive,” mentioned Yelena Shulyatyeva, an economist at BNP Paribas (OTC:). “They are going to most likely overdo it, in our view, and that can finally result in a recession; the query is extra like when, not whether or not, will probably be a recession.”