Fed Holds Rates Amidst Hotter Inflation
Following a higher-than-expected inflation reading in January, the Federal Reserve is likely to maintain its current interest rates in the foreseeable future. The data from the Bureau of Labor Statistics revealed a significant increase in the Consumer Price Index (CPI), exceeding forecasts. Consequently, market expectations for rate cuts in 2025 have been revised to just one towards the end of the year.
Fed Chair Jerome Powell had previously expressed a cautious stance, predicting only two rate cuts in 2025. However, today's reading strengthens his view and raises concerns about inflation driven by the Trump administration's trade policies. Powell emphasized that the Fed "do not need to be in a hurry" to adjust rates if the economy remains robust and inflation stabilizes below the 2% target.
Despite calls from President Donald Trump and Senator Elizabeth Warren to lower rates, the Fed's focus lies on long-term borrowing costs through the 10-year Treasury yield. While some analysts anticipated easier comparisons in Q1 2025, January's hot inflation reading has returned the Fed to a similar position as in early 2024. Capital Economics believes predictions of one rate cut in 2025 are overly optimistic and expects the Fed to maintain current rates for at least the next 12 months.