The Federal Reserve is not expected to cut interest rates before June after weaker-than-expected core inflation data was released earlier this week, according to analysts at UBS.
Core consumer prices rose 0.4% last month, slightly faster than the 0.3% in November, the U.S. Department of Labor’s Bureau of Labor Statistics said on Wednesday. In the twelve months through December, the Consumer Price Index (CPI) rose 2.9%, faster than the previous reading of 2.7%.
Meanwhile, the “core” measure, which excludes volatile items such as food and fuel, rose 0.2% month-on-month and 3.2% year-on-year. Economists had previously estimated the rates of increase to be the same as in November, at 0.3% and 3.3%.
Wall Street’s three major indexes jumped after the report, posting their biggest daily percentage gains since Nov. 6, as expectations of more Fed rate cuts this year grew. Fed officials said that despite the uncertainty surrounding the Trump administration’s upcoming policies, the numbers helped provide a positive outlook for inflation.
U.S. government bond yields, which recently hit multi-month highs, also weighed on stocks. In a note to clients, UBS analysts led by Mark Haefele said the report “appeared to be a relief to investors” who had previously scaled back expectations for a Fed rate cut in 2025.
“The lower inflation data provides a positive signal to the market, especially after a period of high bond yields and declining equity prices,” the analysts wrote.
However, they argued that because the core consumer price reading was “only slightly lower” than expected and last week’s jobs report showed a “firm” labor market, overall U.S. economic activity remains “robust by historical standards.”
“Against this backdrop, we do not expect the latest inflation data to materially change the Fed’s monetary policy stance,” the analysts said. They reiterated their forecast that the Fed, which cut interest rates by a full percentage point last year, is expected to implement another 50 basis point cut in 2025, although they warned that the cuts “may only start again closer to midyear.”
The resilience of the data also factors in the fact that there is “no reason” to expect the Fed to change rates at its two-day meeting this month, analysts said.
