Inflation Test, Tariffs Complicate Rate Cut Bets in US Market

New York - Investors will scrutinize inflation data this week, as President Trump's tariff plans raise concerns over their impact on interest rate expectations.

The S&P 500 remains below record highs despite market volatility caused by headlines of tariffs on major US trading partners. Tariffs are perceived as inflationary, complicating the picture for the Federal Reserve.

The Fed paused rate cuts last month, awaiting data to gauge the need for further easing. The consumer price index (CPI) data, due Wednesday, will provide insight into inflation trends.

A Reuters survey suggests inflation and tariffs will heavily influence market movements this year. "Inflation is the wildcard for 2025 in terms of interest rates," says Charlie Ripley, Allianz Investment Management. "Higher inflation could limit the Fed's ability to cut rates."

The January CPI report is expected to show a 0.3% monthly increase, but analysts caution about potential volatility due to seasonal factors.

Inflation has moderated from 2022's highs but remains above the Fed's 2% target. "We don't want to see CPI heating up again," says Art Hogan, B. Riley Wealth. "It could prolong higher Fed rates."

Markets anticipate the Fed will hold rates steady at its March meeting, with two cuts likely by year-end, according to LSEG data. However, some investors are less optimistic about further easing this year.

Morgan Stanley economists now project only one rate cut in June, citing tariff uncertainty. "The path for monetary policy remains uncertain," they note.

Tariff developments will continue to influence markets, with Trump delaying tariffs on Canada and Mexico while implementing a 10% duty on China. The Cboe Volatility Index spiked after the initial tariff announcement but has since stabilized.

Corporate earnings will also be in focus, with Coca-Cola, Cisco, and McDonald's reporting this week. Over half of S&P 500 companies have reported, and fourth-quarter earnings are projected to rise 12.7% year-over-year, exceeding January's estimate, according to LSEG IBES.

Despite tariff uncertainty, earnings season has been positive for stocks, with solid demand drivers remaining intact, says Anthony Saglimbene, Ameriprise Financial.