"It would not take many more surprises like today's for Fed hawks to start really pushing for a 50 bps hike by May," said strategists at Action Economics in Boulder, Colorado.
The Labour Department's producer price index report showed core prices, excluding food and energy, rising at their fastest pace in six years on spikes in tobacco, auto and alcohol.
"The PPI numbers threw fuel on the fire but Greenspan was the guy who lit the fire," said Alan Ruskin, director of research at 4CAST Ltd, referring to testimony on the economy this week from Federal Reserve Chairman Alan Greenspan.
"The terms of the debate have shifted, but more on Greenspan's comments on the conundrum surrounding low bond yields than anything else," he said.
The Federal Open Market Committee's has raised rates at six consecutive meetings, taking fed funds to 2.50 percent from a decades-low 1.0 percent, and has vowed to remove monetary accommodation at a gradual pace.
The Fed might accelerate its action only if it felt it was behind the curve on increasing inflation, and a single-month surprise on the PPI report did not rise to that level, economists said.
Wednesday's January consumer price index report will give a better sense of whether wholesale prices increases are flowing through to the consumer level.
Core CPI is forecast to rise by a modest 0.2 percent on the month.
A recent shift in Fed officials' tone bears watching more than any one piece of data, said Michael Englund, chief economist at Action Economics.
"Last year the Fed still saw fragility in the economy, but they've discarded that from their rhetoric since January," he said. Greenspan told Congress that the economy "entered 2005 expanding at a reasonably good pace."
Last week San Francisco Fed President Janet Yellen expressed confidence in sustained growth, and Minneapolis Fed President Gary Stern said the stage was set for further economic expansion.
"The debate about Fed policy is really about the second half of year," Englund said, adding that there was no reason to expect a pause in measured rate increases. "The Fed could push the funds rate into the 4 percent to 6 percent range before they can be comfortable," he said.
Eurodollar futures imply an end-of-year fed funds rate near 3.70 percent.
Not all Fed watchers expect bite-sized rate increases to continue indefinitely, with some expecting more sporadic moves to start as early as mid-year.
"The Fed still wants to move back to the lower limit of neutral and then take it data point by data point," said Ruskin.
Greenspan's concern about low long-term yields means the tail could wag the interest rate dog over the next few months, he said.
Normally fixed income dealers use the central bank's views on Fed funds to make trading decisions in bonds. But the reverse may be taking place.
"The Fed does not control the long end of the curve but they find (current levels) hard to justify, so bond yields complicate matters a bit. If the 10-year yield rises back to 4.5 percent there is more chance the Fed will pause the funds rate at 3.25 percent," Ruskin said.