Fed still seen starting rate cuts in March, traders bet

(Reuters) - The Federal Reserve is still seen beginning interest rate cuts in March, though traders became a shade less confident on that start date and on the extent of further rate cuts this year after a U.S. government report Wednesday showed retail sales in December were stronger than expected.

The 0.6% increase in retail sales from the prior month, more than the 0.4% economists had expected in a Reuters poll, suggests upward momentum for household spending and consumer demand that could keep inflation elevated and Fed policymakers hesitant to let up on their restrictive monetary policy stance.

Speaking Tuesday, Fed Governor Christopher Waller said that recent data had made him more confident that inflation is on track to the Fed's 2% goal, but that consumer spending would be a critical component as he looked to incoming data to confirm that outlook.

Futures that settle to the Fed's policy rate on Wednesday pointed to a little under a 60% chance of a rate cut in March, versus about a 65% chance seen at the close of business on Tuesday.

The Fed has kept its policy rate in the range of 5.25%-5.5% since July. Rate-futures contracts are now pricing in a year-end U.S. policy rate of around 3.88%, up from 3.83% immediately before the retail sales report.

Fed policymakers themselves have signaled they expect the policy rate to end the year around 4.6%, though Waller on Tuesday said that the extent of the Fed's actual cuts, and the timing of their start, would depend on the data, especially on inflation.

The Fed next meets in late January.

(Reporting by Ann Saphir; editing by Jason Neely and Chizu Nomiyama)

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