United States one dollar bills are curled and inspected during production at the Bureau of Engraving and Printing in Washington November 14, 2014.
United States one dollar bills are curled and inspected during production at the Bureau of Engraving and Printing in Washington November 14, 2014. Reuters / Gary Cameron

Federal funds rate futures on Thursday have increased the chances of a half percentage-point tightening by the Federal Reserve at next month's meeting following hotter-than-expected U.S. consumer prices data for January.

Rate futures showed a nearly 50% chance that the Fed will raise interest rates by 50 basis points in March, from a 30% chance before the CPI data. For the year, futures have priced about six hikes of 25 basis-point increments, or 150.9 basis points of policy tightening.

Thursday's data showed the CPI index gained 0.6% last month after increasing 0.6% in December. In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.

Some analysts, however, believe the Fed will maintain a gradual approach in tightening monetary policy despite higher-than-expected inflation.

"We all expected an acceleration here...is 7.5% to 7.3% the difference between a 25 and a 50 (basis point hike)? No," said Tom Porcelli, chief U.S. economist, at RBC Capital Markets in New York.

"I sincerely hope that the Fed's reaction function is not that sensitive to this kind of miss. Because the reality is we've had firm inflation now for months.

Following the data, the yield on the U.S. benchmark 10-year note hit 2% for the first time in 2-1/2 years. It was last at 1.985%.

The U.S. 2-year/10-year yield gap flattened to 49 basis points, the tightest spread since early September 2020, as traders priced in hikes that should push short-term rates higher.

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