Fed seen on the fence for interest rate hike at May meeting

(Reuters) – The Federal Reserve is seen as about as likely to raise its benchmark overnight interest rate in May as not, but even if it does, it is expected to reverse course quickly and end the year with rates lower than they began.

That‘s the read from traders of futures contracts tied to the Fed’s policy rate after the U.S. government reported a slight easing in a key gauge of inflation that suggests the U.S. central banks year-long effort to ease price pressures is making some headway.

Prices of Fed funds futures now reflect near-even odds of a quarter-of-a-percentage-point rate hike in May that would take the target range to 5.00%-5.25%, versus standing pat at the current 4.75%-5.00% range, according to the CME FedWatch tool. The Feds policy rate is seen ending the year at between 4.25%-4.50%, based on interest-rate contract pricing.

The personal consumption expenditures (PCE) price index increased 5.0% in February from a year earlier, down from the 5.3% increase in January, the Commerce Department said on Friday.

But with the Fed targeting 2% inflation by that measure, central bankers will likely be wary about declaring victory too soon.

It is “early days yet in terms of assessing whether we really have gone as far as we need to go,” Boston Fed President Susan Collins said in an interview on Bloomberg Television.

Fed policymakers earlier this month signaled that most of them expect one more quarter-percentage-point increase this year and, contrary to market expectations, they dont plan to deliver any interest rate cuts until 2024.

(Reporting by Ann Saphir and Howard Schneider; Editing by Paul Simao)