U.S. CPI exceeds expectations, market expects only 1 rate cut from the Federal Reserve this year!

U.S. inflation data is explosive, further extinguishing market expectations for the Federal Reserve to cut interest rates this year.

According to data from the U.S. Bureau of Labor Statistics, the U.S. CPI rose 0.5% month-on-month in January, the largest increase since August 2023. The core CPI (excluding food and energy) rose 0.4% month-on-month, also higher than expected.

After the data was released, the market adjusted its expectations for the Federal Reserve's interest rate cuts this year. According to interest rate swap contracts, traders now expect only one 25 basis point cut this year, down from previous expectations of at least two, and have pushed back the timing of the cut from September to December.

The CPI data, which was higher than expected across the board, caused U.S. Treasury yields to soar. On Wednesday, the yield on the 10-year Treasury note rose by as much as 12 basis points to 4.66%, while the yield on the 2-year Treasury note rose by 10 basis points to 4.38%, before falling back to around 4.36%.

On the same day, Powell hawkishly stated at a House hearing that the January CPI data reminds us that progress has been made on inflation but has not yet fully reached the target, and he hopes to maintain a restrictive policy for the time being. This year's voting member, Chicago Federal Reserve President Austan Goolsbee, described the latest U.S. CPI data as "alarming."

Analysts pointed out that inflation rates in January tend to be higher because many companies choose to raise prices and fees at the beginning of the year. This pattern has been exacerbated in the post-pandemic era, with some opinions suggesting that the trend of rising prices in January may not repeat in the future.

However, the latest data at least indicates that the process of reducing inflation in the U.S. has at least stalled, and coupled with a solid labor market, the Federal Reserve is likely to keep interest rates unchanged in the foreseeable future. Policymakers are also waiting for further clarification on Trump-era policies, especially tariffs, which have led to rising consumer inflation expectations.

Fitch Ratings Chief Economist Brian Coulton stated: “It almost starts to look like a replay of the first half of 2024, when inflation surprised everyone, including the Federal Reserve.” “This indicates that the Federal Reserve has not yet completed its task of bringing inflation down, and new inflation risks—tariff increases and pressure on labor supply growth—are beginning to emerge.”

Economists at Bank of America, including Aditya Bhave, stated that this report has strengthened their confidence that the Federal Reserve's rate-cutting cycle has ended. In a report following the data release, they wrote: “Now, rate hikes no longer seem so unimaginable.”