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Bond yields fell, and traders of contracts tied to the Fed's policy rate now see only a 12% chance of a rate hike by January, down from 30% before the release of the employment report. Rate futures pricing now reflects a better-than-even chance of a Fed rate cut by May of 2024, with several more cuts expected later next year. U.S. central bankers themselves are not even thinking about rate cuts, Fed Chair Jerome Powell said this week after the Fed kept its benchmark overnight interest rate steady in the 5.25%-5.50% range. "Continued upward momentum would be troubling, and hopefully this recent rise levels off as the labor market recovery continues," said Indeed.com's Nick Bunker. Still for now, most of the worries about the labor market appear to be focused on what might, or might not, happen next rather than on the evidence so far.

Persons: Jerome Powell, Kevin Lamarque, nonfarm, Bond, Powell, Thomas Barkin, Barkin, Michael Feroli, Nick Bunker, Sharif, Julie Su, Ann Saphir, Shristi Achar, Tomasz Janowski, Christina Fincher, Paul Simao, Chris Reese Organizations: Federal, Committee, Federal Reserve, REUTERS, Labor Department, U.S, Fed, Reuters Graphics Reuters, Richmond Fed, CNBC, JPMorgan, Reuters Graphics, Labor, Thomson Locations: Washington , U.S

"The longer we let inflation remain above 2%, we're building in a higher and higher price level," she said, and that hurts American households. "I'm going to have to reassess that because, again, it's going to be, how quickly do you think inflation is moving down?" "I do not want to be in a position of prematurely loosening policy," Mester said. Fed projections submitted in June show a median forecast for 2.1% inflation by the end of 2025; Mester said hers was for 2% inflation. The Fed's next and possibly last rate hike "doesn't necessarily have to be September, but I think this year," she said.

Persons: JACKSON, Cleveland Federal Reserve Bank Loretta Mester, Mester, Ann Saphir, Marguerita Choy Organizations: Cleveland Federal Reserve Bank, Reuters, Thomson Locations: , WYOMING, Jackson Hole , Wyoming

Meanwhile districts reported that the pace of inflation had slowed, with prices rising "moderately" and contacts in most parts of the country expecting a similar pace of price increases in the coming months. But many Fed policymakers since then have signaled they may rather wait before undertaking any further policy tightening. Fed policymakers have said credit conditions are a key input to their calculations for monetary policy-setting. About half of districts reported no change in economic activity in recent weeks, the report showed, while four reported small increases and two reported "slight to moderate declines." At the St. Louis Fed, banking contacts said loan demand had softened and they expected further weakening ahead.

Persons: Louis, Ann Saphir, Andrea Ricci, Chizu Organizations: Federal, Silicon Valley Bank, Signature Bank, Cleveland Fed, Minneapolis Fed, St, Louis Fed, Thomson Locations: U.S, Silicon

But Fed officials on Monday said the jury is very much out. Bostic said businesses in his southeastern U.S. Fed district "are telling me we think you're close to overdoing it ... Investors have consistently bet that the central bank, due to some combination of recession or a faster-than-expected drop in inflation, will be cutting rates by later this year. Minneapolis Fed President Neel Kashkari said the central bank probably has "more work to do on our end, to try to bring inflation back down." In addition, he says the full impact of Fed rate hikes has yet to be felt.

March 2 (Reuters) - A virtual event with Federal Reserve Governor Christopher Waller was canceled on Thursday after the Zoom video conference was "hijacked" by a participant who displayed pornographic images. It is an incident we deeply regret," said Brent Tjarks, executive director of the Mid-Size Bank Coalition of America (MBCA), which hosted the event via a Zoom link. "We have been deeply upset to hear about these types of incidents, and Zoom strongly condemns such behavior," Zoom spokesman Matt Nagel said in a statement. The service has come under fire over privacy and security issues, including incidents of "Zoom bombing" in which uninvited users entered and disrupted meetings. The Fed said the event, which was to feature a speech by Waller as well as a question-and-answer session, was canceled due to "technical difficulties."

"Eventually I want us to get to 25" basis point rate hikes, he said. Asked in a Wall Street Journal interview early on Monday about her preferred rate-hike size for the Jan. 31 to Feb.1 meeting, San Francisco Fed President Mary Daly said both 25 and 50 basis point rate hikes are "on the table" for her. She, like Bostic, expects the Fed policy rate - now at 4.25% to 4.5% - to need to rise to a 5% to 5.25% range to do the job on inflation. After nearly a year of aggressive rate hikes designed to slow the economy and bring soaring inflation to heel, Fed policymakers say they are encouraged by the recent slowing in jobs and wage growth that could signal cooler inflation ahead. But they are loathe to stop interest rate hikes or even downshift to smaller rate-hike increments too soon, for fear of entrenching high inflation and ultimately forcing the Fed to raise rates further.

In the Treasuries market the yield on the 2-year note , the maturity most sensitive to Fed rate expectations, dropped by nearly 20 basis points, the most in one day since June. And traders in futures contracts tied to the Fed's benchmark rate show traders now expect the blistering pace of policy tightening to slow next month. Rate futures contracts are now pricing in a top policy rate in the 4.75%-5% range next March -- lower than the 5%-plus range seen before the report -- and interest-rate cuts in the second half of the year. Continued high inflation for services, possibly reflecting labor markets that remain tight, could prevent any quick resolution of the overall inflation problem. Speaking after the report, Philadelphia Fed president Patrick Harker indicated his support for slowing rate hikes and then stopping, perhaps even earlier than markets are now pricing in.

Now some of those same policymakers are reaching for a more familiar lexicon dating from a time when rate hikes came in bland, quarter-point increments, not the 75-basis-point-per-meeting pace they've stuck to since June. It's one clear signal the U.S. central bank is poised to slow what's been the fastest round of rate hikes in 40 years to take stock of the impact of higher borrowing costs. It was a point seemingly lost on market participants, as U.S. stocks soared and traders priced in a lower peak for the Fed policy rate next year - 4.75%-5%, versus the 5%-plus level seen before the inflation report and the policymaker speeches. But even as she said the peak fed funds rate cannot be "predetermined," she noted that "some have argued" the Fed funds rate must at a minimum rise above year-ahead inflation expectations, currently running at about 5%. Philadelphia Fed President Patrick Harker for his part said he believes the Fed ought to pause once rates get above 4.6%, to gauge the effects of tighter policy.

From a year earlier, prices rose 8.2%, far above the Fed's 2% target. That is still the dominant view, though futures prices now also reflect about a one-in-10 chance of a full percentage-point rate hike next month. By year end, traders now expect the rate to reach 4.5%-4.75% -- the level Fed policymakers had just three weeks ago seen taking until next year to reach -- and topping out around 4.85% by March of next year. Fed policymakers have raised interest rates sharply this year, from near-zero just seven months ago. Traders are pricing a smaller 30 basis point rate cut toward the end of 2023, rate-futures contracts traded at CME Group show.

From a year earlier prices rose 8.2%, far above the Fed's 2% target. That is still the dominant view, though futures prices now also reflect about a one-in-10 chance of a full percentage-point rate hike next month. Fed policymakers have raised interest rates sharply this year, from near-zero just seven months ago. Most global central banks are also raising rates fast, and stock prices around the world have fallen as investors expect growth to slow in response. Traders are pricing a smaller 30 basis point rate cut toward the end of 2023, rate-futures contracts traded at CME Group show.

The rate hikes are the sharpest since the last time the Fed, under Paul Volcker's leadership, battled super-high inflation in the 1980s. But the projections do show Americans are in for some pain ahead as the Fed works to end inflation and prevent what Powell says would otherwise be even worse outcomes. By the end of 2024 policymakers see inflation at 2.3%, and easing to its 2% target by the end of 2025. Historically once the unemployment rate rises by half a percentage point, it continues to rise another point or two, if not more. Wednesday's projections show Fed policymakers have also become more pessimistic about the outlook for economic growth.

Those were the outcomes the last time the Fed, under Paul Volcker's leadership, battled super-high inflation in the 1980s. "While the Fed is still likely to view a soft landing as a modal outcome, the window appears to be narrowing," Bank of America economists wrote. Historically once the unemployment rate rises by half a percentage point, it continues to rise another point or two, if not more. This week's decision is expected to take the Fed policy rate to a range of 3%-3.25% from the current 2.25%-2.50%. Inflation projections, however, could stick close to those laid out in June, he said, amid "dueling forces from inflation persistence and a more aggressive Fed stance and likely recession."

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