Fed Rates on Hold Amid Persistent Inflation
The January CPI report revealed a hotter-than-anticipated inflation surge, pushing the Fed towards maintaining interest rates for the foreseeable future. Fed Chair Jerome Powell stated, "We're close but not there on inflation," emphasizing caution.
Revised Rate Cut Expectations
Markets have adjusted expectations for Fed rate actions in 2025. Traders now anticipate only one rate cut in the latter half of the year. Claudia Sahm of New Century Advisors noted, "The timeline shifts to the second half of the year if things go well."
Core CPI Surge
Excluding volatile food and gas costs, core CPI climbed 0.4% in January, surpassing December's 0.2% increase and marking the largest monthly rise since April 2023. Over the past year, core CPI has increased by 3.3%, indicating a reversal of the deceleration seen in December.
Fed's Cautious Stance
Prior to the latest data, Fed officials envisioned a conservative stance in 2025, projecting two rate cuts. However, inflation concerns and the impact of the Trump administration's economic policies prompted them to lower this estimate to one.
External Pressures
Powell faces pressure from both President Trump, who advocates for lower rates, and Senator Warren, who urges more rapid rate reductions. The Fed maintains a reserved approach, awaiting the implementation of Trump's trade policies and assessing their impact.
Return to 2024 Outlook
The persistent inflation has reversed the Fed's progress made at the beginning of 2024. Economists now believe several months of favorable data are required before rate cuts can be considered again.
Pessimistic Forecast
Paul Ashworth of Capital Economics believes the prediction of one rate cut in 2025 is too dovish. He argues that inflation concerns and trade tariffs will likely keep the Fed from adjusting rates in the next 12 months.