Wall Street comments on CPI: Not enough to prompt the Federal Reserve to cut rates in January, but at least reduces the likelihood of rate hikes
Wall Street analysts have expressed that although the Federal Reserve is highly likely to remain on hold this month, the decrease in the December CPI has reduced the pessimism regarding the Fed's interest rate cut expectations, at least lowering the possibility of rate hikes, reinforcing the view that the Fed's rate cut cycle is not yet over
U.S. inflation accelerated in December but met expectations. Federal funds futures show that traders believe the likelihood of the Federal Reserve not cutting interest rates at all in 2025 has dropped from 26% on Tuesday to 15%. Wall Street analysts have stated that while the Fed is likely to remain on hold this month, the December CPI has reduced the pessimism regarding the Fed's rate cut expectations, at least lowering the possibility of rate hikes.
Timiraos believes that robust employment data, coupled with mixed signs of inflation improvement, has led Fed officials to indicate that they are still prepared to hold steady in January until they see more evidence that current interest rates can effectively curb inflation.
The latest inflation data has not materially affected the answers to these questions. The data neither shows inflation re-accelerating, which would weaken the case for future rate cuts, nor indicates that price pressures are rapidly easing. The Fed, which is in a wait-and-see mode, will need several more months of data to decide on its next policy action.
Tina Adatia from Goldman Sachs Asset Management stated, although the latest CPI data may not be sufficient to make a rate cut in January a possibility again, it reinforces the view that the Fed's rate-cutting cycle is not over.
"However, given that labor market data remains strong, the Fed has the room to remain patient and will need more good inflation data to prompt further easing of policy."
Ellen Zentner from Morgan Stanley Wealth Management also believes that Wednesday's CPI data will not change expectations for a pause in rate hikes at the end of this month, but it should dampen some discussions about the Fed possibly raising rates.
"From the market's initial reaction, investors seem to feel a sense of relief after experiencing several months of sticky inflation data."
Rajeev Sharma from Key Wealth also stated that the data largely met expectations, bringing some comfort to the market.
"However, merely meeting inflation expectations is not enough for the Fed to overlook the strong performance of the labor market, nor is it sufficient for the market to anticipate more rate cuts in 2025."
Seema Shah, Chief Global Strategist at Principal Asset Management, stated:
"For the Fed, this is clearly not enough to prompt a rate cut in January, but if today's reading is accompanied by another lower CPI data next month and weakening employment data, then a rate cut in March could even be back on the table for discussion."
Richard Flynn from Charles Schwab UK stated:
"In the first few weeks of 2025, good economic news has turned into bad news for the market, as a series of strong economic data has pushed inflation concerns to the forefront. Given that inflation remains stubborn, the likelihood that the Fed will choose to keep rates unchanged at the upcoming Federal Open Market Committee (FOMC) meeting at the end of this month is quite high."Jamie Cox of Harris Financial Group stated:
"Core inflation has not accelerated, and that's the whole story. The market may be anxious due to concerns about inflation getting out of control again, but the data does not support that conclusion."
Chris Zaccarelli of Northlight Asset Management stated:
"The market will be encouraged by the decline in core inflation, which should alleviate some pressure on the stock and bond markets, especially given the poor performance earlier this year due to concerns about inflation and the Federal Reserve potentially halting rate cuts or even raising rates."
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, stated:
"Overall, the data is somewhat disappointing, but I think that may be due to food prices. However, if we look at the core data, it is relatively mild, which is good news."
"I don't think this will change the outlook on inflation, nor will it change the likelihood of the Federal Reserve remaining cautious. So, for now, the dollar is weakening, yields are declining, and I think the market is focused on core inflation data."
"I believe this report does not indicate much change. Overall, inflation remains stubborn."