Fed Keeps Rates on Hold Amid Higher Inflation, Reinforcing Powell's Cautious Stance

Higher-than-Expected Inflation Reading

The Bureau of Labor Statistics' Consumer Price Index (CPI) data for January revealed an unexpected rise in inflation, surpassing forecasts. This increase has significantly impacted the Federal Reserve's (Fed) outlook for interest rates.

Fed's Response

Fed Chair Jerome Powell has reiterated a cautious stance, indicating that the central bank will maintain restrictive policies for the near future. The unexpected inflation reading has further solidified this cautious approach.

Market Adjustments

Traders have adjusted their Fed rate cut expectations downwards, now predicting only one potential cut later in 2025. The January inflation data has extended the timeline for potential rate cuts.

Core CPI Data

Excluding volatile food and gas prices, core CPI prices increased by 0.4% over the month, the largest monthly increase since April 2023. Year-over-year, core CPI prices rose by 3.3%, marking an uptick from December's 3.2%.

Political Pressure

The inflation reading has increased pressure on Powell, with President Donald Trump calling for lower rates and Senator Elizabeth Warren advocating for more aggressive rate cuts.

Powell's Comments

Despite political pressure, Powell has emphasized the need for a cautious approach, stating that the Fed will hold rates steady if the economy remains strong and inflation does not subside.

10-Year Treasury Yield

The hotter inflation data led to an increase in the 10-year Treasury yield on Wednesday.

Economist Views

Economists believe that the central bank is back to the position it held in early 2024, requiring several months of positive data before considering rate cuts. Some economists predict that the Fed will maintain current rates for at least the next 12 months.