After Inflation Data, Markets Expect Only One Rate Cut in 2025
The unexpected rise in U.S. inflation, surpassing expectations, caught investors off guard and triggered an increase in Treasury yields. In this scenario, what will the Federal Reserve do next?
Wall Street has now pushed back expectations for the Fed’s next rate cut to December after core inflation in the U.S. exceeded forecasts last month. Markets now anticipate just a single 0.25 percentage point rate reduction in 2025, following a 0.4% rise in the core Consumer Price Index (CPI) for January, which excludes food and energy.
Treasury bonds fell, driving yields across all maturities up by at least eight basis points. The CPI data was described as being on the “warmer side of mild,” with some analysts noting that inflation figures are not aligning with the Fed’s expectations.
In the swap markets tied to Federal Reserve policy, traders had already priced in just 25 basis points of easing. Before the inflation report, markets had expected the first rate cut of the year to come in September.
Yields on two-year Treasury notes, the most sensitive to central bank policy, surged up to 10 basis points, reaching 4.38%. Meanwhile, the 10-year yield briefly climbed 10 basis points to 4.64%.
This report arrives at a pivotal moment for both Federal Reserve policymakers and the U.S. government debt market. On Tuesday, Fed Chair Jerome Powell told Congress that there is no urgency to cut rates, citing the economy’s resilience.
Inflation Data Catches Wall Street Off Guard
The U.S. Bureau of Labor Statistics released the January CPI report, revealing a larger-than-expected rise in inflation for the first month of the year. Meanwhile, core prices reversed their previous month’s slowdown, keeping the focus firmly on the Federal Reserve’s next policy moves.
According to the latest figures from the Bureau of Labor Statistics, the CPI rose 3% year-over-year in January, up from 2.9% in December.
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