Fed Likely to Hold Rates Amid 0.3% CPI Increase, Tariffs Fuel Inflation

The bond futures market, as indicated by the CME FedWatch Tool, has a 98% probability that the Federal Reserve will maintain interest rates unchanged in March. This expectation comes amidst a complex economic landscape, where inflation pressures remain elevated despite some signs of easing. The upcoming February Consumer Price Index (CPI) report, scheduled for release on March 12, is anticipated to show a month-on-month increase of 0.3% in consumer prices, which would reduce the annual inflation rate from 3.0% in January to 2.9%. Core inflation, excluding volatile food and energy prices, is expected to rise by 0.3% month-on-month and 3.2% year-on-year. If these predictions hold, the overall CPI inflation annual rate will fall below the psychological threshold of 3% for the first time since the beginning of 2023.

Analysts believe that the preliminary effects of tariffs imposed by the Trump administration will be evident in the report, contributing to sustained high price pressures in the short term. The uncertainty surrounding tariffs has already begun to influence the outlook, as businesses stock up on inventory in anticipation and consumer sentiment worsens. A senior economist noted that the downward pressure on inflation from commodity prices has started to slow due to tariff uncertainties. He predicts that prices for new cars, used cars, food, and clothing will rise in February. Economists also expect increases in airfares and communication services, while housing prices are anticipated to ease slightly.

The impact of tariffs on consumer prices is already being felt, with some businesses, such as car dealers, raising prices in response. Industries with significant imports, like consumer electronics, auto parts, and housewares, are expected to be most directly affected by these price changes. Economists warn that if trade frictions persist, they could undermine the Federal Reserve's confidence in the downward trend of inflation, potentially delaying interest rate cuts.

Federal Reserve Chairman Powell has indicated that the central bank will maintain interest rates unchanged in the coming months, waiting for the uncertainty caused by Trump's policies to settle. However, the market's expectations for interest rate cuts this year have been advanced, with bond futures traders estimating a 55% probability of a 0.25 percentage point rate cut at the June meeting. The health of the labor market may become a key factor in the central bank's decision-making, as headwinds intensify due to tariff uncertainties and other economic challenges.

Financial markets have become increasingly sensitive to inflation data, with each release potentially causing significant volatility. Higher-than-expected inflation data could trigger substantial sell-offs in the stock and bond markets. Currently, US stocks are facing a crisis, with Trump's tariffs causing panic among investors and leading to sell-offs as concerns about economic slowdown increase. Analysts warn that data above expectations could exacerbate concerns about economic stagflation, further impacting stock market performance.