Traders now expect just one rate reduction this year despite Trump’s call for lower rates
US inflation rose in January, strengthening the Federal Reserve’s case to keep interest rates on hold despite President Trump’s fresh demands for rate cuts.
The consumer price index posted its biggest increase since August 2023, government data released Wednesday showed, jumping by 0.5% as the price of groceries and gas ticked upwards.
Chances of a Fed cut in the months ahead appear to be receding despite Trump’s Truth Social comment that rates “should be lowered, something which would go hand in hand with upcoming Tariffs!”
The headline inflation figure now sits at 3%, while the core consumer price index (CPI) – which excludes food and energy costs – saw a bigger-than-expected climb to 3.3%.
Higher shelter costs contributed to almost 30% of January’s overall inflation increase, while car insurance, prescription drug, and airfare costs all put upward pressure on the core numbers.
Pledges to bring inflation lower were a cornerstone of Trump’s successful 2024 presidential campaign, but the latest figures underline the challenge facing the new president – with his proposal to introduce wide-ranging tariffs on countries including Mexico and Canada stoking fears that prices across a range of categories could be set to rise.
Traders are only expecting the Fed to cut once in 2025, interest rate swaps showed after the release of the Bureau of Labor Statistics report. Two cuts were previously anticipated.
The central bank opted to hold rates unchanged in its first announcement of the year, citing inflationary concerns as a key reason for its decision to pause a run of cuts.
Speaking before a Senate committee Tuesday, Fed chair Jerome Powell indicated that the central bank won’t be rushed on rate cuts and said it would be weighing up the “net effect” of the Trump administration’s policies, which include mass deportations, on the economy.
Treasury yields jumped in the wake of the inflation news, while the S&P 500 opened lower and the dollar strengthened.
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