Hotter Inflation Reading Spurs Fed to Hold Rates Amidst Policy Uncertainties
A higher-than-expected inflation reading in January 2025 has cast doubt on the likelihood of Federal Reserve rate cuts and reinforces cautious sentiments from Chair Jerome Powell and other policymakers. Traders now anticipate a single rate cut later in the year, deviating from previous projections of multiple reductions.
Core CPI prices, excluding food and energy, surged 0.4% over the previous month and 3.3% year-over-year, marking the highest monthly increase since April 2023. This rise has prompted concerns and speculation about the Fed's policy trajectory.
Prior to the latest data, Fed officials had signaled a cautious approach to rate cuts in 2025. This stance was further emphasized by Powell during his Senate appearance, where he expressed the willingness to hold rates steady amidst a strong economy and inflation not significantly deviating from the 2% target.
However, the higher inflation reading has intensified pressure on Powell, particularly considering the potential inflationary impact of Trump administration trade policies. President Trump has called for lower rates, while Senator Elizabeth Warren has advocated for rate cuts at the March Fed meeting.
Meanwhile, Treasury Secretary Scott Bessent has indicated the administration's focus on reducing long-term borrowing costs through the 10-year Treasury yield. Analysts believe that inflation readings in the first quarter of 2024 may provide context for Fed decision-making, but January's data suggests continued challenges.
Economists at Capital Economics predict no rate cuts in 2025, expecting tariffs to maintain core inflation levels above 3%.