Markets Scale Back Fed Rate Cut Bets
Markets are now pricing in just two Fed rate cuts for 2026, down from three, after recent hot inflation data. The recalibration has triggered a rally in the US dollar, with analysts warning the path to monetary easing is getting complicated. Meanwhile, 30-year mortgage rates have dipped modestly, but further declines aren't guaranteed in the volatile macro climate.
The "hot inflation data" reflects the Consumer Price Index rising 0.2% in January 2026 and 2.4% over the last 12 months. The core CPI, which excludes food and energy, saw a more significant increase of 0.3% for the month and 2.5% annually, signaling persistent underlying price pressures. Producer prices also surged unexpectedly, with the Producer Price Index for final demand jumping 0.5% in January, the largest increase since September of the previous year. This was driven by a 0.8% advance in services, suggesting inflation is broadening beyond goods. Despite the inflation concerns, the labor market remains a key focus for the Federal Reserve. The U.S. unemployment rate ticked down to 4.3% in January 2026, with the economy adding 130,000 jobs. This resilience gives the Fed more flexibility to keep rates higher for longer to combat inflation. At its January 2026 meeting, the Federal Open Market Committee (FOMC) held the federal funds rate steady at a target range of 3.50%–3.75%. The committee's statement acknowledged that economic activity has been expanding at a "solid pace" but noted that inflation "remains somewhat elevated." Two FOMC governors, Stephen Miran and Christopher Waller, dissented from the January decision, favoring a 25 basis point cut. This internal division highlights the growing debate within the central bank about the appropriate path for monetary policy amid conflicting economic signals. Looking ahead, the next CPI data is scheduled for release on March 11, 2026, which will be a critical input for the Fed's subsequent meetings. Analysts will be closely watching for signs of cooling in the services sector to gauge the effectiveness of the Fed's policy stance.
