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Expectations for Federal Reserve interest rate cuts have taken a significant hit following the release of a hotter-than-anticipated inflation report for January and subsequent comments from Fed Chair Jerome Powell. Market predictions have undergone a dramatic shift, now suggesting a rate cut is highly unlikely before September of this year, if at all. The prospect of a second rate cut has been pushed even further into the future, with some forecasts suggesting it may not occur until late 2026.
The January Consumer Price Index (CPI) painted a concerning picture of persistent inflation. The report revealed a 0.5% monthly increase, pushing the annual inflation rate up to 3%. This figure is slightly higher than the 2.9% recorded in December and only marginally lower than the 3.1% seen in January 2024, indicating a frustratingly slow pace of disinflation. Even more troubling was the rise in core inflation, which excludes volatile food and energy prices. Core CPI climbed to 3.3%, significantly exceeding the Federal Reserve’s 2% target and suggesting underlying price pressures remain stubbornly entrenched in the economy.
Powell’s testimony before the House Financial Services Committee further solidified the shift in market sentiment. While acknowledging the “great progress” made in curbing inflation from its peak, Powell emphasized that the Fed is “not quite there yet” in achieving its price stability goals. He reiterated the Fed’s commitment to maintaining a restrictive monetary policy stance for the foreseeable future. This hawkish tone, combined with the disappointing CPI data, has significantly dampened hopes for near-term rate cuts and underscored the central bank’s resolve to prioritize bringing inflation under control, even at the risk of slowing economic growth.
The reaction in futures markets has been decisive. Traders have drastically revised their rate cut expectations. Previously, the market had priced in a potential rate cut as early as June, with the possibility of another reduction before the end of the year. Now, the consensus view is for the first move to occur no earlier than September, with a very low probability of a follow-up cut before the end of 2025. The CME Group’s FedWatch tool, which tracks market probabilities of Fed rate moves, reflects this dramatic shift. The tool currently indicates only a 55.9% probability of a rate cut in September, with even lower odds assigned to earlier dates. The likelihood of a second cut by the end of 2025 has dwindled to a mere 31.3%, highlighting the market’s growing belief that the Fed will remain on hold for an extended period.
Analysts suggest the Fed will interpret the January inflation data as confirmation of persistent and broad-based price pressures within the economy. This is expected to reinforce the likelihood of the Fed slowing, or even completely halting, any further rate cuts in 2025. Concerns about potential future inflationary pressures, such as those stemming from potential trade tariffs, further complicate the Fed’s efforts to achieve its 2% inflation target.
While the Fed’s preferred inflation gauge is the personal consumption expenditures (PCE) index, which will be released later in February, the CPI report has already had a profound impact on market sentiment and expectations for future rate cuts. The combination of stubbornly high inflation and a hawkish Fed Chair has significantly reduced the likelihood of near-term monetary easing, leaving investors bracing for a potentially longer period of restrictive monetary policy.
