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Investors reduced their bets that the Federal Reserve will start cutting interest rates in May after data showed U.S. inflation fell less than expected to 3.1 percent in January.
After Tuesday’s release, the futures market’s implied probability of a rate cut in May fell from 50 percent to 30 percent, while the probability of a rate cut in March was almost completely eliminated.
The yield on two-year government bonds, which moves with interest rate expectations, rose by 0.13 percentage points to just under 4.6 percent. The benchmark 10-year government bond yield rose 0.11 percentage points to 4.28 percent. Yields rise when prices fall.
The S&P 500 stock index fell 1.4 percent after opening in New York, while the tech-heavy Nasdaq Composite fell nearly 2 percent.
The figures come as the Fed considers when to begin cutting interest rates from their current level of 5.25 percent to 5.5 percent after a protracted campaign to curb persistent price pressures.
“This is uncomfortable data for the Fed and.” [a] “Plan to cut rates relatively soon,” said Dean Maki, chief economist at Point72 Asset Management. “I think this eliminates the need for a rate cut in March and makes a cut in May unlikely.”
Economists surveyed by Bloomberg had forecast annual consumer price inflation of 2.9 percent, compared with 3.4 percent in December.
Core inflation, a closely watched measure that excludes volatile food and energy prices, was 3.9 percent year-on-year in January, on par with the previous month.
The sharp overall decline in inflation last year has led central bankers in the US, Europe and Britain to rule out further interest rate hikes and discuss the possibility of rate cuts.
Fed Chairman Jay Powell said last month that the Federal Open Market Committee expects to cut interest rates three times this year. But he suggested it was unlikely to begin until further progress was made toward his 2 percent inflation target.
The dollar, whose moves are influenced by changes in interest rate expectations, traded 0.6 percent higher as inflation data was released.
Housing, car insurance and medical care all contributed to price pressure in January. Accommodation, the largest component of which is rental costs, had the biggest impact on core inflation, with the index rising 0.6 percent in January.
Tuesday’s figures showed that while the ongoing deflationary trend in core goods continued, inflation in services remained strong, partly due to a rise in the cost of medical care.
The Fed’s preferred measure of inflation is the core personal consumption expenditures index, which has slowed more dramatically than the CPI. The core PCE index rose 2.9 percent on an annual basis in January, the first reading of less than 3 percent in about three years.
Headline monthly inflation rose 0.3 percent, exceeding the forecast of 0.2 percent.
The Fed’s next policy meeting is scheduled for March 19 and 20, when it will release its latest “dot plot” survey showing officials’ forecasts for interest rates, inflation and unemployment.