Markets push back rate cut expectations to September as inflation pressures persist, impacting policy decisions
The US Federal Reserve is unlikely to cut interest rates until at least September 2025, following a higher-than-expected inflation report for January.
According to CNBC, futures markets have shifted from expecting a June rate cut to anticipating no policy changes until fall, with minimal chances of a second reduction before 2026.
Bill Adams, chief economist at Comerica, stated, “The Fed will see January’s hot inflation print as confirmation that price pressures continue to bubble beneath the economy’s surface.”
He noted that this reinforces the central bank’s stance to slow or possibly halt rate cuts in 2025.
Market expectations for Federal Reserve easing weakened after the US’ January consumer price index (CPI) showed a 0.5 percent monthly increase.
The annual inflation rate climbed to 3 percent, slightly above December’s level and marginally below the 3.1 percent recorded in January 2024.
US Core inflation, which excludes food and energy and is a key measure for the Fed, rose to 3.3 percent, remaining well above the central bank’s 2 percent target, as reported by CNBC.
Federal Reserve Chair Jerome Powell, speaking before the US House Financial Services Committee, acknowledged the progress made in reducing inflation but stated, "We're not quite there yet. So, we want to keep policy restrictive for now.”
As inflation remains above the Fed’s target and shows no recent progress, expectations for additional rate cuts have diminished.
The Fed previously reduced its benchmark short-term borrowing rate by a full percentage point in 2024.
The CME Group’s FedWatch gauge, as of late Wednesday morning, indicated that traders assigned only a 2.5 percent probability to a rate cut in March, 13.2 percent in May, 22.8 percent in June, and 41.2 percent in July.
By September, the probability rose to 55.9 percent, with uncertainty persisting into October, where futures implied a 62.1 percent likelihood of a reduction.
Market pricing suggests only a 31.3 percent probability of a second rate cut by the end of 2025, with expectations pointing to the next reduction occurring in late 2026. The current target range for the federal funds rate stands at 4.25 percent to 4.5 percent.
The US CPI report’s impact extends beyond monetary policy. Policymakers are also considering potential inflationary effects from trade policies.
Former President Donald Trump has advocated for aggressive tariffs, which could further elevate prices and complicate the Federal Reserve’s goal of achieving price stability, according to The Guardian.
James Knightley, chief international economist at ING, stated, “There is no getting away from the fact that this is a hot report.” He noted that potential tariffs could pose an upside risk for inflation, making it difficult for the Federal Reserve to justify rate cuts in the near future.
While the Fed closely monitors CPI and other price indices, its preferred inflation measure is the personal consumption expenditures (PCE) price index.
The US Bureau of Economic Analysis will release the PCE data later in February.
Citigroup expects core PCE to decline to 2.6 percent for January, a 0.2 percentage point decrease from December, as reported by CNBC.
The broader economic outlook remains uncertain, as investors react to persistent inflation pressures and shifting rate expectations.
The S&P 500 fell 0.3 percent, and the Dow Jones Industrial Average dropped by 225 points (0.5 percent) after the CPI report, reflecting concerns about prolonged high interest rates, according to The Associated Press.
Atlanta Federal Reserve President Raphael Bostic emphasized the need for greater clarity before considering further rate reductions.
He stated that uncertainties surrounding inflation trends and policy decisions require careful observation, as reported by Reuters.
