S&P 500: Powell’s Caution and Upcoming CPI Report Keep Markets on Edge
A resilient labor market is complicating the inflation picture. Strong wage growth and steady consumer spending have given the Fed room to maintain its current policy stance. January’s inflation data could determine whether rate cut expectations for 2025 remain intact or face further downward revisions.
Tariffs Pose New Inflation Risks
Trump’s newly implemented tariffs add a fresh layer of uncertainty to inflation projections. Economists at Deutsche Bank estimate that the tariffs could push inflation higher by up to two percentage points in 2025, depending on how much of the cost is passed on to consumers. While immediate CPI data won’t reflect these impacts, traders will be watching closely for signs that imported goods prices are beginning to rise.
Fed Chair Jerome Powell has acknowledged the uncertainty surrounding trade policy, noting in his recent testimony that tariffs could influence inflation outcomes. However, he reiterated the Fed’s patient stance, signaling no rush to adjust interest rates.
Fed Rate Cut Expectations Diminishing
With inflation still elevated and the economy showing resilience, traders are scaling back expectations for rate cuts. Bond futures now reflect just an 8.5% chance of a 25-basis-point cut in March, down from 14% a week ago. The odds of a June cut remain near 43%, while some analysts suggest the Fed may not cut rates at all this year.
Dallas Fed President Lorie Logan recently reinforced the central bank’s cautious stance, stating that even if inflation falls toward 2%, strong labor market conditions could justify keeping rates steady. Meanwhile, Bank of America economists have revised their forecast, now predicting no rate cuts for the remainder of the year.