Fed seen raising rates to 5.1%, then (maybe) stopping

(Reuters) -The Federal Reserve is seen raising its policy rate at least twice more to the 5%-5.25% range, with financial markets retaining about even odds on Tuesday for a further quarter-point hike in the summer after a government report showed inflation still high but slowing.

The Fed raised rates faster and farther last year than at any time since the 1980s to bring down inflation, taking the benchmark rate from near-zero last March to a current target range of 4.5%-4.75%.

The U.S. Labor Department reported the consumer price index rose 6.4% last month from a year earlier, far above the Fed’s 2% target but a step down from last year’s blistering pace.

Traders are now betting heavily that the Fed will continue to raise rates, by a quarter of a percent at each of its next two meetings in March and in May, based on pricing in futures contracts tied to the Fed policy rate. That would bring the benchmark rate to where Fed policymakers have since December said it will need to go to be “sufficiently restrictive” to bring down inflation.

After that the contracts are pricing about an even chance of a further increase in June or July, to a 5.25%-5.5% range.

Fed policymakers for their part have signaled that the ultimate stopping point for rates will depend on whether inflation continues to decelerate, as they expect.

“It’s still very easy to make the case that it looks like inflation will continue to soften as the year progresses,” said Tom Porcelli, chief economist at RBC Capital Markets, after Tuesday’s data. “I’m sure this comes as an enormous source of relief at the Fed.”

Traders also see the Fed cutting rates toward the end of the year, bringing them back below 5% by December, as inflation continues to fall.

(Reporting by Ann Saphir with reporting by Karen Brettell and Lucia MutikaniEditing by Kirsten Donovan and Chizu Nomiyama)