A hotter-than-expected inflation reading at the start of 2025 makes it much more likely that the Federal Reserve will keep rates on hold for the foreseeable future, reinforcing a cautionary stance from Fed Chair Jerome Powell and other central bank policymakers.
After the latest data from the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) rose more than forecast in January, traders reduced their expectations for rate cuts in 2025 to just 1 — and not until much later in the year.
"It really does push the timeline into the second half of the year if things go well," Claudia Sahm, chief economist at New Century Advisors and former Fed economist, told chof360 Finance.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in January climbed 0.4% over the prior month — higher than December's 0.2% monthly gain and the largest monthly rise since April 2023.
Core CPI prices also rose 3.3% over last year, marking an uptick from the 3.2% seen in December, which was the first time since July that year-over-year core CPI showed a deceleration in price growth.
Fed officials were already predicting a cautious stance in 2025 before today's reading.
In December they predicted two cuts for all of 2025, downgrading a previous estimate of four, due to the uncertain path of inflation and concerns about the effect of economic policies from the new Trump administration.
Powell reinforced that view in an appearance before Senate lawmakers Tuesday, saying the Fed can hold rates steady for longer if the economy remains strong and inflation does not continue to move sustainably toward a target of 2 percent.
"With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance," Powell said.
But the higher inflation reading may heighten pressure on Powell, as he navigates the trade policies from the Trump administration that some economists predict will push inflation higher and political calls for rates to go lower from both sides of the aisle.
President Donald Trump in a social media post Wednesday called for the rates to go lower, although he didn’t specify if he was talking about the Fed’s short term rates or longer-term borrowing costs.
"Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!" he posted.
In a separate post he also said, "Biden inflation up!"
Meanwhile, Senate Banking Committee Ranking member, Elizabeth Warren, a Democrat, told Powell Tuesday that she wanted to see rates be reduced at the Fed’s next meeting in March.
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"I urge you to move more rapidly to bring down interest rates beginning with a meaningful rate cut next month," Warren told Powell.
Treasury Secretary Scott Bessent has said the administration is looking to lower long-term borrowing costs via the 10-year Treasury yield, not through targeting the Fed’s short-term benchmark interest rate. The yield on the 10-year Treasury is moving higher on the hotter inflation report.
There was hope among Fed officials that given hotter inflation readings in the first quarter of 2024, that comparisons would become easier this first quarter. However, January’s reading showed hotter inflation even before any impact of tariffs.
Sahm told chof360 Finance the Fed is back to where it was at the start of 2024, needing several months of good data before it can think about lowering rates again.
"It is not a good way to start things off" in 2025.
Capital Economics chief North America economist Paul Ashworth said he thinks that prediuctions of 1 cut in 2025 are "too dovish."
"With tariffs likely to keep core PCE inflation close to, or above, 3% this year now, the Fed will stand pat for at least the next 12 months."
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