By Howard Schneider and Jonnelle Marte

(Reuters) – Data watched closely by the Federal Reserve showed inflation expectations remained broadly anchored through the end of last year, while an alternate measure of inflation showed the most intense price pressures may have begun to ease.

At the same time, a Reuters poll of economists confirmed expectations of a weak January U.S. jobs report, with data to be released on Friday anticipated to show just 153,000 positions added in what would be the worst showing in a year. About 10% of those polled think the economy lost jobs over the month, which featured a record number of new COVID-19 infections from the highly transmissible Omicron variant.

That good-news-bad-news mix could well typify the nature of incoming economic data in the weeks ahead as policymakers gear up to start reversing the extraordinary accommodation they put in place two years ago to shield the economy from the economic fallout of the pandemic.

The U.S. central bank has all but said it will begin raising interest rates at its March 15-16 policy meeting to kick off a steady tightening of monetary policy meant to ensure inflation is brought under control. The pace of price increases has accelerated to multi-decade highs and at 5.8%, by the Fed’s preferred measure, is nearly three times the central bank’s 2% target.

But data in the interim could influence how fast policymakers expect subsequent rate increases to be approved, and how firmly they are willing to lay out that path in their policy statement.

The start of the year may leave room for debate, with some economists forecasting little to no economic growth for the first few months of the year with job growth dampened by the ongoing Omicron-driven outbreak.

In an interview with Reuters Breakingviews, San Francisco Fed President Mary Daly said it was clear rates should rise, but that the Fed needed to look at a broad set of risks – including, for example, that support from federal spending will decline this year, and that overreacting could damage the recovery just as inflation is easing on its own.

“Do we need to adjust the policy rate? Absolutely,” Daly said. But “you don’t want to overreact and ratchet rates too quickly … We are not trying to combat some viscous wage-price spiral. We are just recognizing the economy is getting itself to a self-sustaining level” and does not need the Fed’s help in the form of low market interest rates.

‘EVERY OPTION’ ON THE TABLE

Inflation data to be released next week is expected to show consumer prices through January continued speeding ahead at an annual pace of more than 7% – a level more reminiscent of the high inflation era of the 1970s and early 1980s and enough to offset recent wage gains for many workers.

But the monthly pace of change is expected to ease, and other recent inflation data have pointed in that direction as well.

Along with actual pricing data, Fed officials pay close attention to measures of inflation expectations, or how households and businesses anticipate inflation will behave in the future.

On Friday, the Fed updated an index that combines several measures of household and market expectations. It has risen this year, but was largely unchanged from the prior quarter even as inflation itself sped ahead – a sign the public had not lost faith in the Fed’s ability to defend its 2% target even after a period of faster-than-anticipated price increases.

(Graphic: Fed inflation expectations index, https://graphics.reuters.com/USA-FED/EXPECTATIONS/zjvqkqgxmvx/chart.png)

A separate Dallas Fed inflation measure that excludes items with the fastest and slowest price increases did increase slightly in December, from 2.9% to 3% on an annual basis, a sign that inflation was broadly affecting the economy.

But the month-to-month rate fell sharply, and the share of goods seeing the fastest price increases fell as well.

(Graphic: Faster price increases easing, https://graphics.reuters.com/USA-FED/ECONOMY/znvnejzxjpl/chart.png)

Still, the Fed has positioned itself to raise rates, and if inflation trends don’t turn lower, central bank officials have insisted they will do what it takes, including raising rates at every meeting or in larger than the usual quarter-percentage-point increments.

For now “every option is on the table for every meeting,” Atlanta Fed President Raphael Bostic told the Financial Times over the weekend. “If the data say that things have evolved in a way that a 50-basis-point move is required or (would) be appropriate, then I’m going to lean into that . … If moving in successive meetings makes sense, I’ll be comfortable with that.”

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

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