Morgan Stanley sees another 25-bps Fed hike in March after strong jobs report

NEW YORK (Reuters) – The Federal Reserve is likely to raise interest rates by another 25 basis points (bps) at the March policy meeting following a blockbuster U.S. non-farm payrolls report for January, according to Morgan Stanley’s latest research note released on Friday.

The U.S. investment bank previously called for a pause in the rate-hiking cycle in March after the Fed increased the policy benchmark rate by 25 bps on Wednesday. The current benchmark rate stands in a range of 4.50% to 4.75%

Friday’s robust payrolls number has changed that forecast, Morgan Stanley said.

“Even with more data outstanding ahead of the March FOMC, we think there is not enough time for the data to signal to the Fed that rates have moved sufficiently into restrictive territory,” Morgan Stanley wrote in the research note.

Data showed that non-farm payrolls surged by 517,000 jobs last month, the most in six months. Economists in a Reuters poll had expected a gain of 185,000. Data for December was revised higher to show 260,000 jobs added instead of the previously reported 223,000.

The unemployment rate, on the other hand, hit more than a 53-1/2-year low of 3.4%.

Morgan Stanley also raised the peak fed funds rate to 4.875% from a previous estimate of 4.75%. However, it still sees the first rate cut in December 2023.

The rate futures market on Friday has priced in a terminal rate of 5.02% hitting in June. It has been under 5% for the last several weeks.

The Fed has projected it will raise its key policy rate to between 5% and 5.25% and keep it there at least until the end of the year.

(Reporting by Gertrude Chavez-Dreyfuss; editing by Jonathan Oatis)