Softer CPI a ‘sigh of relief’ for markets, but rates likely to remain steady — asset managers

February's softer-than-expected CPI data showed further signs of progress on underlying inflation, but don't expect the Federal Reserve to cut rates anytime soon, asset managers said.

The pace of price increases cooled after January’s numbers, but the Fed is "still likely to remain on hold (on interest rates) 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," said Kay Haigh, global co-head and co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management, which has $3.14 trillion in assets under supervision.

Skyler Weinand, chief investment officer at Regan Capital, described the latest CPI data as 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.”

But even with a milder CPI, Weinand thinks the Fed still will be in a “wait-and-see mode for at least the next six-to-eight months.”

Regan has $2.5 billion in assets under management.

The Bureau of Labor Statistics reported on March 12 that the CPI rose an annualized 2.8% in February from a year ago, below the 3% figure recorded in January, and also below forecasts. Economists were expecting a 2.9% annualized CPI figure for February, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, core CPI rose by an annualized 3.1% in February, below the 3.3% pace reported in the prior month, and also below 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 on Jan. 29.

As of the morning of March 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% probability that the Fed will keep rates frozen when it issues its next monetary policy decision March 19, and only a 3% probability it will cut rates by 25 basis points.

Weinand further noted that “the tariff-driven stock market correction is unlikely to cause the Fed to cut interest rates sooner, and any rate cuts are likely to still come towards the end of 2025.”

Jeff Schulze, head of economic and market strategy at ClearBridge Investments, described the February CPI data as “unambiguously positive” for risk assets because 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.

However, Schulze cautioned that the Fed will “also need to see that inflation expectations are recovering from their recent rise before cutting rates, as a de-anchoring of inflation expectations is what keeps most central bankers up at night, given the challenge it represents to restoring price stability in the future.”

ClearBridge has $189.6 billion in AUM.

John Kerschner, head of U.S. securitized products and portfolio manager at Janus Henderson, said he thinks market volatility will continue apace given the daily pronouncements on tariffs coming out of the White House.

“With that being said, investors can at least take a modicum of faith that the rate hikes that the Fed put in place several years ago are continuing to work and slowly bringing down inflation to their 2% target,” he added. “While we do not believe the Fed cuts rates next week at their meeting, this does leave the door open for a May, or more likely a June cut.”

Janus Henderson has $378.7 billion in AUM.

But Ronald Temple, chief market strategist at Lazard’s financial advisory and asset management businesses, cautioned that the impact of the tariffs that the White House has slapped on some foreign imports won’t show up in the CPI data for several months, since importers have front-loaded purchases to delay the hit from higher duties.

“I would caution investors to curb their enthusiasm as the cumulative future impact of tariffs continues to build,” he added.

Lazard has $224.9 billion in AUM.