(Yahoo! Finance) - A hotter-than-expected inflation reading at the start of 2025 makes it much more likely that the Federal Reserve will keep rates on hold for the foreseeable future, reinforcing a cautionary stance from Fed Chair Jerome Powell.
"I would say we're close but not there on inflation," Powell said Wednesday in an appearance before House lawmakers, citing the new reading released earlier in the day.
So "we want to keep policy restrictive for now."
Markets are adjusting their expectations for what the Fed may do this year. After the latest data from the Bureau of Labor Statistics showed that the Consumer Price Index (CPI) rose more than forecast in January, traders reduced their prediction of 2025 rate cuts down to just one — and not until much later in the year.
"It really does push the timeline into the second half of the year if things go well," Claudia Sahm, chief economist at New Century Advisors and former Fed economist, told Yahoo Finance.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in January climbed 0.4% over the prior month — higher than December's 0.2% monthly gain and the largest monthly rise since April 2023.
Core CPI prices also rose 3.3% over last year, marking an uptick from the 3.2% seen in December, which was the first time since July that year-over-year core CPI showed a deceleration in price growth.
Fed officials were already predicting a cautious stance in 2025 before today's reading.
In December they predicted two cuts for all of 2025, downgrading a previous estimate of four, due to the uncertain path of inflation and concerns about the effect of economic policies from the new Trump administration.
Powell reinforced that view in appearances before Senate and House lawmakers Tuesday and Wednesday, saying the Fed can hold rates steady for longer if the economy remains strong and inflation does not continue to move sustainably toward a target of 2%.
"We do not need to be in a hurry to adjust our policy stance," Powell said.
But the higher inflation reading may heighten pressure on Powell as he navigates the trade policies from the Trump administration that some economists predict will push inflation higher and political calls for rates to go lower from both sides of the aisle.
In a social media post on Wednesday, President Donald Trump called for the rates to go lower, although he didn't specify whether he was talking about the Fed's short-term rates or longer-term borrowing costs.
"Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!" he posted.
In a separate post, he also said, "Biden inflation up!"
Meanwhile, Senate Banking Committee ranking member Elizabeth Warren, a Democrat, told Powell Tuesday that she wanted to see rates reduced at the Fed's next meeting in March.
"I urge you to move more rapidly to bring down interest rates, beginning with a meaningful rate cut next month," Warren told Powell.
Treasury Secretary Scott Bessent has said the administration is looking to lower long-term borrowing costs via the 10-year Treasury yield and not by targeting the Fed's short-term benchmark interest rate. The yield on the 10-year Treasury moved higher Wednesday on the hotter inflation report.
Powell repeatedly on Wednesday declined to speculate on what Trump's trade policies might mean for inflation, arguing that policymakers need to see what is actually implemented and then assess the impact.
While it's "possible that the economy would evolve in ways partly because of tariffs that we will need to do something with our policy rate," the Fed is "reserving judgment until we know what the policies are."
Sahm, the former Fed economist, told Yahoo Finance the central bank is now back to where it was at the start of 2024, needing several months of good data before it can think about lowering rates again.
"It is not a good way to start things off" in 2025, she added.
Capital Economics chief North America economist Paul Ashworth even said he thinks predictions of one cut in 2025 are "too dovish."
"With tariffs likely to keep core PCE inflation close to, or above, 3% this year now, the Fed will stand pat for at least the next 12 months."
By Jennifer Schonberger - Senior Reporter
