The expectation of a rate cut by the Federal Reserve has been delayed until September or even later, as inflation data sparks market worries.

Affected by the latest inflation report, the market has made significant adjustments to its expectations for a rate cut by the Federal Reserve. Currently, it is widely believed that the earliest the Fed might initiate a rate cut is in September, and it may not even cut rates at all throughout the year. Previously, the market had predicted a high likelihood of a rate cut in June and possibly another one before the end of the year, but now this expectation has been greatly postponed. The latest released Consumer Price Index (CPI) for January shows that inflation in the United States remains stubborn. The data shows that the CPI rose by 0.5% month-on-month, pushing the annual inflation rate up to 3%, higher than December of last year, and only slightly lower than 3.1% in January of 2024. Excluding food and energy, the core CPI shows a more severe performance, with an annual growth rate of 3.3%, far above the Fed's target of 2%. Chief economist Bill Adams of Comerica Bank said in his analysis, "The Fed views the strong inflation data for January as evidence that price pressures are still accumulating beneath the economic surface, which will strengthen its inclination to slow down or even completely stop the rate cuts in 2025." Other analysts on Wall Street have expressed similar views. Fed Chair Powell emphasized at a congressional hearing on Wednesday that the inflation rate has significantly decreased from its peak, but "we have not yet fully achieved our target, so we need to continue to maintain a restrictive monetary policy." Since inflation has not reached the 2% target, hopes for further policy easing by the Fed in 2024 have been dampened. Last year, the Fed reduced the benchmark short-term interest rate by a cumulative 1 percentage point, but the current inflation situation has made it more uncertain whether they will continue cutting rates in the future. According to the CME Group's FedWatch tool, as of Wednesday morning, the market's probability of a rate cut by the Fed in March is only 2.5%, in May is 13.2%, in June it rises to 22.8%, in July 41.2%, and the likelihood of a rate cut in September is 55.9%. However, even a rate cut in September is not certain at this point, and the market expects the probability of a rate cut in October to increase to 62.1%. Furthermore, the market's probability of another rate cut before the end of 2025 is only 31.3%, and current rate futures pricing shows that the Fed may not consider further rate cuts until the end of 2026. Currently, the target range for the Fed funds rate is maintained at 4.25% to 4.5%. In addition to inflation itself, the Fed is also monitoring the U.S. government's trade policy. President Trump is currently pushing for a more aggressive tariff policy, which could further push up prices and make it harder for the Fed to achieve its rate-cutting goals. James Knightley, Chief International Economist at ING, said, "This CPI report undoubtedly shows that inflation remains high, coupled with the possible implementation of trade tariffs, the Fed will find it difficult to justify a rate cut in the short term." CPI is a key inflation indicator that the market pays attention to, but the Fed prefers to use the Personal Consumption Expenditures Price Index (PCE) to assess inflation. The Bureau of Economic Analysis will release the January PCE data later this month. Citigroup expects that core PCE for January may drop to 2.6%, a decrease of 0.2 percentage points from December of last year. However, even if PCE falls, it is still above the Fed's 2% target, and in the short term, it is not enough to trigger a rate cut decision.