Cooling February CPI Lifts Rate Cut Hopes: What the Experts Are Saying
While the Fed is likely to keep interest rates unchanged next week, an encouraging February CPI report raises the odds for more easing later this year.
The latest Consumer Price Index (CPI) report showed inflation cooled more than expected in February, lifting expectations the Federal Reserve could resume rate cuts sooner than anticipated.
According to the Bureau of Labor Statistics, headline CPI rose 0.2% month over month in February, slower than January's 0.3% rise and economists' projections for a 0.3% increase. Year over year, CPI was up 2.8%.
Shelter accounted for almost half of the monthly increase, rising 0.3% from the month prior, though this was offset by a 4% drop in airline fares and a 1% decline in gas prices.
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Core CPI, which excludes volatile food and energy prices and is seen as a better measure of underlying inflation trends, was up 0.2% from January to February and 3.1% year over year. Both figures were lower than what was seen the month prior and arrived below economists' forecasts.
"The better-than-expected inflation print will help reduce the recent political noise and calm markets," says Eugenio Alemán, chief economist at Raymond James. "It also reinforces our view that the disinflationary process is alive and well."
Alemán adds that there will likely be "some inflationary impact from tariffs," but in the grand scheme of things, "the disinflationary trend remains intact" and this is good news for the Fed.
According to CME FedWatch, futures traders are now pricing in a 55% chance the Fed will issue its next quarter-point rate cut at its June meeting, up from 31% one month ago. The betting odds are for two additional rate cuts by the end of the year.
As for the next Fed meeting, which concludes one week from today, it's widely anticipated the central bank will hold interest rates steady.
With the February CPI data now in the books, here's some of what economists, strategists and other experts around Wall Street have to say about the results and what they could mean for investors going forward.
Experts' takes on the February CPI report
"The February CPI release showed further signs of progress on underlying inflation, with the pace of price increases moderating after January's strong release. While the Fed is still likely to remain on hold at this month's meeting, the combination of easing inflationary pressures and rising downside risks to growth suggest that the Fed is moving closer to continuing its easing cycle." – Kay Haigh, global co-head of Fixed Income and Liquidity Solutions in Goldman Sachs Asset Management
"The tariff-battered markets are going to breathe a sigh of relief, as higher inflation was the only thing that could make things worse. With a lower-than-expected inflation number (both month over month and year over year), at least the Fed still has the flexibility to step in to support a weaker economy, and that would be good news for markets, which have been through the wringer in the past month and a half." – Chris Zaccarelli, chief investment officer for Northlight Asset Management
"Wednesday's weaker-than-expected CPI is a slight sigh of relief for the Federal Reserve and the markets because it shows that inflation is moving in the right direction, which is a nice setup as the market starts to prepare for a potential resurgence of inflation from tariffs. While it is possible for the 10-year Treasury yield to breach 4% in the near term amid the broader stock market volatility, we see it retreating back towards 5% in 2025 given a lack of demand for duration along with inflation pressure reviving." – Skyler Weinand, chief investment officer at Regan Capital
"Core services inflation is unequivocally decelerating, giving the Fed room to focus on the growth mandate. In the near term, we may see some volatility in consumer prices as businesses and consumers anticipate looming tariffs." – Jeffrey Roach, chief economist for LPL Financial
"Today's inflation release is unambiguously positive for risk assets as there is greater confidence that inflation is not re-accelerating like January's data showed, which gives policymakers a bit of breathing room and should allow the Fed to loosen policy should signs of labor market weakness emerge." – Jeff Schulze, head of Economic and Market Strategy at ClearBridge Investments
"Inflation is moving in the right direction, which makes the Fed more likely to cut rates again in coming months. At the same time, the dizzying back-and-forth over tariffs is a large and unpredictable upside risk to the inflation outlook. The policy changes day to day and minute to minute, but the high-level takeaway is that tariff rates look likely to be higher in the second half of 2025 than they were in the first. That would increase the cost of imported consumer goods and input costs for service-providing businesses, likely interrupting inflation's move lower." – Bill Adams, chief economist at Comerica Bank
"After reaching close to correction territory [on Tuesday], today's CPI print is allowing the market to breathe a sigh of relief. While stock markets are responding to a weaker print, but bond markets are reacting with higher yields so far." – Gargi Chaudhuri, chief investment and portfolio strategist, Americas at BlackRock
"With today's data adding to the case for rate cuts and risk assets rallying in response, it's possible that recession risks have already been fully priced in. Bitcoin has rebounded, retesting $85K, while index futures push higher. This dynamic suggests that any rate cuts materializing this year could unleash a flood of liquidity, propelling equities and crypto higher." – Matt Mena, crypto research strategist at 21Shares
"Today's cooler-than-expected CPI reading was a breath of fresh air, but no one should expect the Fed to start cutting rates immediately. The Fed has adopted a wait-and-see posture, and given the uncertainty of how trade and immigration policy will impact the economy, they're going to want to see more than one month of friendly inflation data." – Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management
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