Hotter-than-expected January inflation numbers may put 'final nail in coffin for rate-cut cycle,' asset managers say

A stronger-than-expected January inflation figure is likely to further cement the Federal Reserve’s cautious approach to monetary easing, said Whitney Watson, global co-head and co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management.

“A resilient labor market also provides scope for patience,” Watson added. “We think the Fed is likely to remain in ‘wait and see mode’ for the time being and anticipate the Fed staying on hold at next month’s meeting.”

GSAM has $3.14 trillion in assets under supervision.

Josh Jamner, investment strategy analyst at ClearBridge Investments, said the “red-hot” January consumer price index inflation numbers followed comments on Feb. 11 by Fed Chairman Jerome Powell that the central bank is not “in a hurry” to adjust interest rates. “This (CPI) report puts the final nail in the coffin for the rate-cut cycle, which we believe is over,” he added.

ClearBridge has $189.6 billion in assets under management.

The Bureau of Labor Statistics reported Feb. 12 that the CPI rose an annualized 3% in January from a year ago, above the 2.9% figure recorded in December, and also above forecasts.

Economists were expecting a 2.9% annualized CPI figure for January, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, core CPI rose by an annualized 3.3% in January, slightly above the 3.2% pace reported in the prior month, and also above economists’ forecasts of 3.2%.

The Fed has considered the inflation rate a key factor in its monetary policy decisions.

The Fed’s key short-term interest rate is currently in a range of between 4.25% to 4.5%, after the central bank chose to keep rates unchanged Jan. 29.

As of the morning of Feb. 12, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 97.5% probability that the Fed will keep rates frozen when it issues its next monetary policy decision March 19, and only a 2.5% probability it will cut rates by 25 basis points.

Skyler Weinand, CIO at Regan Capital, which has $2.3 billion in assets under management, also thinks the Fed will remain "on hold" with interest rates for at least the remainder of 2025, in the wake of the latest inflation data.

“Inflation and inflation expectations are both rising, which is something the Fed needs to counter by keeping rates higher for longer,” he said. “The Fed has nothing to do at this point but wait and see, and hope that the economic indicators change to suggest more progress on inflation. If consumer prices or inflation expectations rise any further, it is quite possible that the Fed’s next move is to raise short-term interest rates.”

Dan Siluk, head of global short duration and liquidity and a portfolio manager at Janus Henderson Investors, said following the January CPI data that “the bottom line is clear. The Fed should not be cutting.”

Janus Henderson has $379 billion in AUM.

Weinand further noted that the Fed is facing “extreme uncertainty” around the new Trump administration’s policies and how they will affect consumer prices.

“Tariffs, fiscal deficits, and uncertain tax and spending policies in 2025 is creating extreme anxiety for the Federal Reserve, and making it tougher for them to reduce interest rates anytime soon,” he added.