Interest rate cuts are not supported at this time! After the CPI release, Federal Reserve's Goolsbee "hawks": inflation needs to further decline

On Friday local time, Federal Reserve Chair Jerome Powell stated that “before supporting another rate cut, I want to see more progress in inflation moving back toward the Fed’s 2% target.”

This indicates that “under current economic conditions, Powell is not yet supportive of a rate cut.”

“Powell remains concerned about inflation,” noting that the U.S. economy is currently growing strongly and the labor market is stable. Therefore, before lowering interest rates, he needs to see inflation return to the 2% level.

“If we can make further progress in fighting inflation, I believe there is still considerable room to cut rates, but we do need to see inflation continue to improve. At the same time, we also need to see the labor market remain stable like it has in recent months,” Powell said in an interview.

Data released on Friday showed that the U.S. Consumer Price Index (CPI) in January rose 2.4% year-over-year, hitting a new low since May 2025, below market expectations of 2.5%. The core CPI, excluding food and energy costs, increased 2.5% year-over-year, the lowest since March 2021, in line with expectations.

Although U.S. inflation in January was milder than market expectations, it still remains above the Fed’s 2% target.

Powell stated that “despite some positive signs in Friday’s inflation report, there are also concerns.” He pointed out that in areas affected by tariffs, goods prices seem to have been controlled, but he is worried about higher service sector inflation, which he says “has not yet been contained” and is not driven by tariffs.

“What’s more concerning is that we still see high inflation in the service sector, and this type of inflation tends to be persistent,” Powell said. “We hope we have already seen the peak impact of tariffs on inflation, and that this effect will ultimately prove to be temporary.”

Powell hinted that there is still room for further rate cuts before reaching what he considers the neutral interest rate—one that neither stimulates nor restrains economic growth.

Regarding the current interest rate level, Powell said, “I’m not sure how tight current policy is. Inflation has been above the target for more than four and a half years. Before starting to cut rates, we need to see tangible improvements in inflation, not just hope for it to improve on its own.”

However, after the release of January inflation data, traders increased bets that the Fed is likely to cut rates more than twice by 2026.

The Fed’s next meeting is scheduled for March 17-18. According to CME’s “FedWatch,” the probability of a 25 basis point rate cut in March is currently 9.8%, while the chance of holding rates steady is 90.2%.

(Source: Caixin)