The Federal Reserve's interest rate cut expectations have been postponed to September or even later, as inflation data raises market concerns

According to the Zhitong Finance APP, influenced by the latest inflation report, the market's expectations for the Federal Reserve's interest rate cuts have undergone significant adjustments. Currently, the market generally believes that the Federal Reserve may not start cutting rates until September at the earliest, and it may not cut rates at all throughout the year. Previously, the market had predicted a high possibility of a rate cut in June and potentially another cut before the end of the year, but this expectation has now been significantly delayed.

The latest Consumer Price Index (CPI) data for January shows that inflation in the United States remains stubborn. The data indicates that the CPI rose by 0.5% month-on-month, bringing the annual inflation rate to 3%, higher than the level in December last year, and only slightly below the 3.1% in January 2024. The core CPI, excluding food and energy, shows an even more severe performance, with an annual growth rate reaching 3.3%, far exceeding the Federal Reserve's target of 2%.

Bill Adams, Chief Economist at Comerica Bank, stated in an analysis: "The Federal Reserve views the strong inflation data for January as evidence that price pressures continue to build beneath the surface of the economy, which will strengthen its tendency to slow down or even completely halt interest rate cuts in 2025." Other analysts on Wall Street have expressed similar views.

Federal Reserve Chairman Jerome Powell emphasized during a congressional hearing on Wednesday that while the inflation rate has significantly decreased from its peak, "we have not yet fully achieved our target, so we need to continue to maintain a restrictive monetary policy."

As inflation has not yet reached the 2% target, market hopes for the Federal Reserve to further ease policies in 2024 have also been dampened. Last year, the Federal Reserve cumulatively lowered the benchmark short-term borrowing rate by 1 percentage point, but the current inflation situation makes it more uncertain whether it will continue to cut rates in the future.

According to CME Group's FedWatch tool, as of Wednesday morning, the market's probability of a Federal Reserve rate cut in March is only 2.5%, 13.2% in May, rising to 22.8% in June, 41.2% in July, and a 55.9% chance in September. However, even for a September rate cut, the current probability is still not certain, with the market expecting the probability of a rate cut in October to rise to 62.1%.

Additionally, the market sees only a 31.3% chance of another rate cut before the end of 2025, while current interest rate futures pricing indicates that the Federal Reserve may not consider further rate cuts until the end of 2026. Currently, the target range for the Federal Funds Rate remains at 4.25% to 4.5%.

It is worth noting that, in addition to inflation itself, the Federal Reserve is also paying attention to the U.S. government's trade policies. President Trump is currently pushing for more aggressive tariff policies, which could further drive up prices and make it more difficult for the Federal Reserve to achieve its rate cut goals.

James Knightley, Chief International Economist at ING Group, stated: "This CPI report undoubtedly shows that inflation remains high, and coupled with potential trade tariffs, it will be difficult for the Federal Reserve to justify rate cuts in the short term."

The CPI is a key inflation indicator that the market focuses on, but the Federal Reserve prefers to use the Personal Consumption Expenditures Price Index (PCE) to assess inflation conditions. The U.S. Bureau of Economic Analysis will release the January PCE data later this month Citigroup expects that the core PCE in January may drop to 2.6%, a decrease of 0.2 percentage points compared to December of last year. However, even if the PCE declines, it is still above the Federal Reserve's target of 2%, and is not sufficient to prompt a rate cut decision in the short term