Investors adjusted their expectations regarding the Federal Reserve’s potential interest rate cuts in response to the latest data revealing that US inflation moderated less than anticipated in January, reaching 3.1 percent.
Following the data release on Tuesday, the probability of a rate reduction in May, as implied by futures markets, dropped from 50 percent to 30 percent, while the likelihood of a cut in March was nearly eliminated.
The two-year Treasury yield, sensitive to interest rate expectations, climbed by 0.14 percentage points to 4.6 percent. Similarly, the benchmark 10-year yield increased by 0.11 percentage points to 4.28 percent. Yields typically rise as bond prices fall.
Meanwhile, in New York, the S&P 500 index was down 1.1 percent by late morning, while the Nasdaq Composite, heavy on technology stocks, dipped 1.2 percent.
These developments occur as the Federal Reserve deliberates on the timing of potential interest rate reductions from the current range of 5.25 to 5.5 percent, following an extended effort to control persistent inflationary pressures.
Dean Maki, chief economist at Point72 Asset Management, remarked, “This data presents challenges for the Fed and any plans for near-term rate cuts. I believe this removes the possibility of a rate cut in March and makes a May cut less likely.”
Bloomberg-polled economists had anticipated a 2.9 percent annual consumer price inflation rate for January, down from December’s 3.4 percent.
Core inflation, which excludes volatile food and energy prices, remained at 3.9 percent year-on-year in January, consistent with the prior month.
The significant overall decline in inflation over the past year has led central bankers in the US, Europe, and the UK to rule out further rate hikes and begin discussions about potential cuts.
Federal Reserve Chair Jay Powell stated last month that the Federal Open Market Committee anticipated three interest rate cuts this year but indicated they were unlikely to begin until more progress was made toward the 2 percent inflation target.
Kristina Hooper, chief global market strategist at Invesco, noted, “The Fed will likely require more data before feeling comfortable cutting rates. Progress is ongoing, but perhaps not as rapid as the Fed desires.”
US President Joe Biden remarked on Tuesday, “Despite robust growth and employment, inflation has decreased significantly, but there is still work to be done to reduce costs.”
The dollar, influenced by changes in rate expectations, traded 0.6 percent higher following the inflation data release.
Housing, vehicle insurance, and medical care contributed to January’s price pressures. Shelter costs, driven primarily by rental expenses, had the most substantial impact on core inflation, rising by 0.6 percent in January.
The latest figures revealed a continued trend of deflation in core goods while inflation in services persisted, partly due to rising medical care costs.
The Fed’s preferred inflation measure, the core personal consumption expenditures index, slowed more sharply than the CPI. The core PCE index rose 2.9 percent annually in January, marking the first reading below 3 percent in about three years.
Monthly headline inflation increased by 0.3 percent, surpassing the 0.2 percent forecast.
The Fed’s upcoming policy meeting is scheduled for March 19-20, during which it will release its latest “dot plot” survey detailing officials’ projections for interest rates, inflation, and unemployment.