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Investors reduce their bets on a May rate cut due to high US inflation figures

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Investors scaled back their bets that the Federal Reserve would begin cutting interest rates in May after data showed U.S. inflation slowed less than expected in January, to 3.1 percent.

Following Tuesday’s release, the chance of a May rate cut, implied by futures markets, fell from 50 percent to 30 percent, while the chances of a March cut were almost entirely eliminated. eliminated.

The two-year Treasury yield, which moves with interest rate expectations, rose 0.13 percentage points to just under 4.6 percent. The benchmark 10-year yield rose 0.11 percentage points to 4.28 percent. Yields increase as prices fall.

The S&P 500 stock index fell 1.4 percent after the New York open, while the tech-heavy Nasdaq Composite fell nearly 2 percent.

The figures come as the Fed considers when it should begin cutting interest rates from their current level of 5.25 percent to 5.5 percent, after a long campaign to rein in persistent price pressures.

“This is embarrassing data for the Fed and (its) intention to cut rates relatively quickly,” said Dean Maki, chief economist at Point72 Asset Management. “I think that eliminates the possibility of a rate cut in March, and it makes a rate cut in May unlikely.”

Economists surveyed by Bloomberg forecast an annual consumer price rise of 2.9 percent, up from 3.4 percent in December.

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Core inflation, a closely watched measure that excludes volatility in food and energy prices, was 3.9 percent year-on-year in January, in line with the previous month.

The drastic overall decline in inflation over the past year has prompted central bankers in the United States, Europe and the United Kingdom to rule out further rate hikes and begin discussing the possibility of cuts .

Fed Chairman Jay Powell said last month that the Federal Open Market Committee planned to cut interest rates three times this year, but he signaled that it was unlikely to begins to do so until further progress is made towards its 2 percent inflation target.

The dollar, whose movements are influenced by changes in rate expectations, traded 0.6 percent higher as the inflation data was released.

Housing, auto insurance and medical care all contributed to price pressures in January. Housing, whose largest component is the cost of rent, had the biggest influence on core inflation, with the index rising 0.6 percent in January.

Figures released Tuesday showed that although the deflationary trend in basic goods continued, inflation in services remained strong, partly due to an increase in the costs of medical care.

The Fed’s preferred measure of inflation is the core index of personal consumption expenditures, which has slowed more dramatically than the CPI. The core PCE index rose 2.9 percent in January on an annual basis, the first reading of less than 3 percent in about three years.

Monthly headline inflation rose 0.3 percent, beating the 0.2 percent forecast.

The Fed’s next policy meeting is scheduled for March 19-20, during which it will release its latest “dot plot” survey showing officials’ projections for interest rates, inflation and unemployment.

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