by Ann Saphir and Lindsay Dunsmuir

(Reuters) – U.S. money markets are pricing in the Federal Reserve (Fed) could continue to tighten monetary policy on Wednesday with a quarter-point rate hike, a move that just days ago looked unlikely in due to turbulence in the banking sector.

A 25 basis point hike would take the federal funds rate target from 4.75% to 5%. The Fed would thus follow the European Central Bank which decided on Thursday to maintain its pace in terms of rate hikes, the too high level of inflation outweighing fears of destabilization of the global banking system.

Money market futures now price in more of a chance that the Fed will hike rates by 25 basis points and the probability of a status quo is about one in five.

A sharper-than-expected decline in weekly jobless claims, another sign that the job market remains buoyant, and stronger-than-expected housing data also bolstered expectations of a Fed rate hike.

“The Fed will likely take a two-track approach, similar to that of the ECB, separating monetary policy from macroprudential policy,” said Gregory Daco, chief economist at EY Parthenon, who also expects the US central bank to raise costs. borrowing by a quarter point next week.

Many traders are now anticipating a rate cut from the summer, although since the ECB’s decision, they expect US rates to come back at a slower pace. Fed rates are now expected to end the year just below 4%.

(Ann Saphir and Lindsay Dunsmuir, Laetitia Volga, editing by Kate Entringer)

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