Inflation eases less than forecast, wrecking bets on spring Fed rate cut

Inflation remains stubbornly high heading into the start of the year as the economy continues to outperform.

Feb 13, 2024 - 20:30

0 8

Inflation eases less than forecast, wrecking bets on spring Fed rate cut

Updated at 8:59 AM EST

U.S. inflation pressures eased in January, official data indicated Tuesday, but the decline was less than expected and confirms the Federal Reserve's caution on near-term interest rate cuts.

The headline consumer price index for January was pegged by the Commerce Department at 3.1%, easing from the prior month's tally of 3.4% but coming in firmly above Wall Street's 2.9% consensus forecast.

On a monthly basis, inflation edged 0.3% higher, matching the 0.3% gain in December and rising from the 0.1% advance in November.

So-called core inflation, which strips out volatile components like food and energy, held at 3.9%, the lowest in more two years but higher than the Street's 3.7% forecast. The monthly reading of 0.4% also topped Wall Street forecasts and was higher than December's 0.3% reading.

The Fed tracks core inflation pressures as part of its price-stability mandate, and the year-on-year gains remain nearly double its preferred target of 2%.

Fed officials have been reluctant to the confirm the timing of their three forecasted rate cuts for this year, preferring, in the words of Chairman Jerome Powell, to wait for "confidence" in the fact that inflation is returning to target.

Fed Chairman Jerome Powell says he needs "more confidence" that inflation is slowing "before we take that very important step of beginning to cut interest rates."
Chip Somodevilla/Getty Images

"The upside CPI surprise may not make bulls happy in the short term, but it won’t necessarily alter the interest rate outlook," said Chris Larkin, managing director for trading at investing at E*TRADE from Morgan Stanley. "Just as the Fed said it wouldn’t rush to cut rates even after several months of encouraging economic data, they’re not going to immediately reverse course just because of one hotter-than-expected CPI reading."

"Until proven otherwise, the longer-term cooling inflation trend is still in place," he added. "The Fed had already made clear that rate cuts weren’t going to happen as soon as many people wanted them to. Today was simply a reminder of why they were inclined to wait."

U.S. stocks extended earlier declines following the data release, with futures tied to the S&P 500 indicating a 561 point opening bell decline while those tied to the Dow fell 344 points. The Nasdaq was down 292 points.

Benchmark 10-year Treasury note yields surged 13 basis points following the data release to change hands at 4.282% while 2-year notes were pegged at 4.62%, 17 basis points higher from prior to the data release.

More Economy:

The CME Group's FedWatch has long discounted the chances of a Fed rate move next month in Washington, now pegs the chances of a quarter-point cut in May at around 32.5%, down from around 55% prior to the data release.