Investing.com -- January’s hot inflation report coupled with the stellar monthly jobs report last week delivered a mighty blow to rate-cut expectations, with some on Wall Street reiterating calls for the Federal Reserve interest rates to remain on a long hold for the year.
"Our baseline FOMC view remains for a long hold in 2025 and no change in the fed funds rate, a view we updated following last week’s strong employment report. Today’s result further reinforces this call," Macquarie said in a recent note.
Data on Wednesday showed month-on-month, the consumer price index unexpectedly accelerated to 0.5%, up from 0.4% in the prior month and faster than economists’ expectations of 0.3%. This hot inflation data could filter through to core PCE, the fed’s preferred inflation measure, depending on whether the PPI data, due Thursday, also come in hot, Macquarie added.
The stall in disinflation comes as slowing goods prices have bottomed offsetting moderating housing inflation, including rent and OER. There are now "upside risks to this ahead that could result from implemented and threatened tariffs," Macquarie said.
As fears emerge that inflation is picking up once again, the Fed’s March meeting, which will include fresh projections on the rate cut as well as the inflation outlook, is becoming increasingly important.
The projections, however, are expected to shift in a "hawkish direction when it is updated in mid-March with participants likely increasing their estimates of the longrun/neutral rate," Macquarie said.
A higher neutral rate -- one that neither stimulates nor weighs on economic growth -- would suggest that the road to further rate cuts is narrowing.