By Ann Saphir
(Reuters) - Federal Reserve policymakers may feel less pressed to ramp up the pace of their policy tightening this month after data Friday showed wage gains slowed in February, rekindling hopes inflation will ease as the pandemic-disrupted labor market normalizes.
Also fueling bets the Fed will stick to a quarter-point interest-rate increase at its March 21-22 meeting: U.S. regulators on Friday closed Silicon Valley Bank after its shares tanked amid concerns over its balance sheet, and central bankers may be wary of causing more strain on the banking sector with sharper rate hikes.
Still, next Tuesday's publication of the widely watched consumer price index could still push Fed Chair Jerome Powell and colleagues to deliver a 50-basis-point increase at their March 21-22 policy-setting meeting, a move that would put the benchmark rate at 5.00%-5.25%.
And the jury is still out on how high borrowing costs will need ultimately go.
"We would not get too relaxed about 50," said Evercore ISI's Krishna Guha. "We roll on to the inflation prints next week that could now be the decider, along with whether bank stress calms quickly or not"
The U.S. unemployment rate ticked up to 3.6% in February as more workers entered the labor force, and average hourly earnings growth slowed to 0.2% from 0.3% in January, the Labor Department's report showed on Friday.
The month's payroll gains of 311,000 exceeded expectations. But hiring was concentrated in a narrower range of industries, even as the slowdown in wages was seen across a broad range of jobs, signs some economists pointed to as suggesting that what is still an extremely tight labor market is set to ease.
(Graphic: February job gains concentrated - https://www.reuters.com/graphics/USA-FED/JOBS/zdvxdxzbbvx/chart.png)
That could set the stage for slower job growth, lessening price pressures ahead and reducing the need for the Fed to return to the aggressive rate hikes it used last year to rapidly reach a more restrictive monetary policy setting.
"This report screams soft landing and looks to be a pretty good one for the Fed," said Omair Sharif of Inflation Insights. "In the current environment, this is basically what the Fed is hoping to see."
(Graphic: Wage growth is slowing - https://www.reuters.com/graphics/USA-ECONOMY/JOBS-WAGES/gkvlwlonqpb/chart.png)
Futures tied to the Fed policy rate now point to a quarter-point rate hike this month to a target range of 4.75%-5% as more likely than a bigger half-point rate hike.
Earlier this week, after Powell told Congress the Fed is prepared to speed up its rate-hike pace if the "totality" of the data warrants, a half-point increase was seen as the far-more likely outcome.
Hotter-than-expected reads on the job market and inflation in January had some U.S. central bankers thinking they may need to drive rates above the 5.1% they had projected in December.
"The Fed can take comfort in the rise in the supply of labor and the easing of upward pressure on wages to maintain a 25 basis point rate increase," Nationwide Chief Economist Kathy Bostjancic said. "However, the February CPI report will also weigh heavily in the Fed’s deliberations of whether to raise rates 25bps or 50bps. Another rapid rise in consumer inflation could tip the scales towards 50bps."
Futures traders have now all but abandoned bets from earlier this week on the benchmark rate approaching 6%. They are now are pricing in a high-water mark of 5.25%-5.5%.
Still, wage data in the jobs report is notoriously volatile, and some analysts continue to forecast a higher plateau for the Fed policy rate in coming months, even if it gets there stepwise in quarter-point increments.
In particular focus is the strength of services inflation not tied to housing, which accounts for a little more than half of the inflation index. That has remained hot even as goods inflation has eased.
(Graphic: As goods inflation eases, services step in As goods inflation eases, services step in - https://www.reuters.com/graphics/USA-FED/INFLATION/lbvgndazapq/chart.png)
"Underlying trends in job growth and core services inflation over the past six months make it clear that progress on slowing labor market conditions and thus easing core inflation is stalling," wrote TD Securities' analysts after the jobs report. They now expect the Fed to raise its benchmark rate to 5.5%-5.75% by July.