The CME Fedwatch Tool saw a significant uptick in the probability of Federal Reserve rate cuts following the release of the latest Consumer Price Index (CPI) data. While a January rate cut remains off the table, projections for a potential rate reduction in March spiked from 20% to 28%. The likelihood of a May cut rose to 52%, surpassing the 50/50 threshold, and June saw its probability increase to 67% from 55%.
Investor sentiment has shifted understanding of future monetary policy, with markets now pricing a 50% probability for a second rate cut in 2025. The anticipated overall cut in 2025 climbed to 39 basis points, up from 27 earlier in the week. Meanwhile, the odds of no rate cuts in 2025 decreased to 19%, down from 30% at the start of the week.
Fedwatch adjustments reflect a growing expectation among investors for a dovish shift by the Federal Reserve, as cooling inflation pressures may pave the way for policy easing. This recalibration highlights changing market perspectives on the direction of U.S. interest rates.
In a surprising outcome, the Bureau of Labor Statistics reported core inflation—excluding volatile categories like food and energy—rose by 3.2% in December, slightly lower than economists’ consensus of 3.3% and a decrease from November’s figures. Meanwhile, headline inflation rose by 2.9% over the year, aligning with expectations.
The CPI report set off a notable drop in the 10-year Treasury yield, which fell to 4.686%, down by 10 basis points. Growth stocks reaped the benefits; Tesla saw a jump of around 5% while Nvidia gained 2%.
