Traders priced in higher odds that the Federal Reserve will cut interest rates more than two times this year, prompting Treasury market gains after the latest gauge of inflation showed a surprise.

  • Overall inflation unexpectedly dropped to 2.4% in January from the same time last year. That was down from the previous 2.7% annual pace.
  • Core inflation, which filters out volatile food and energy prices, ticked down to 2.5% on a year-over-year basis. It last stood at 2.6%.

Since the Consumer Price Index rose less than expected last month, it may have addressed concerns of some Fed policymakers that inflation may be too high to cut interest rates more than once this year, especially after the hot January jobs report was much stronger than expected.

“If January’s CPI had come in hot, we would have cautioned against taking it too literally – but the fact that the January report was so tepid relative to a typical January is somewhat of a signal…We expect disinflationary pressure to dominate in the next few months, and expect the Fed to cut rates by 100 bps this year,’’ Bloomberg economists said in a note.

The Bureau of Labor Statistics reported Feb. 13 that the CPI rose 0.2% rise in January, the smallest gain since July, reflecting lower energy costs.

Alongside recent signs of a stabilizing labor market, Fed officials will likely want to see further progress on inflation before lowering interest rates.

“On balance, we found today’s report to be encouraging,” Wells Fargo & Co. economists said in a note reported by Bloomberg. “Tariff-induced price hikes probably have not fully worked their way through the data, but we are closer to the end than the beginning of this source of higher prices.”

U.S. Bureau of Labor Statistics

FOMC January meeting holds rates steady

The Federal Open Market Committeevoted 10-2 to hold interest rates steady at 3.50% to 3.75% in January on the benchmark Federal Funds Rate after three continuous cuts of 25 basis points in its last three meetings of 2025.

The Federal Funds Rate guides interest rates for investors and consumers on auto and student loans, home-equity loans and credit cards.

For consumers, a delayed rate cut could mean higher borrowing costs that remain in place longer than expected.

Fed Governors Stephen Miran and Christopher Waller dissented, saying they would have preferred a 25 basis-point cut due to softening in the labor market. 

It was the FOMC’s first pause since July 2025.

How the Fed manages interest rates 

The Fed’s dual congressional mandate requires it to balance inflation and job growth via interest rates.

  • Lower interest rates support hiring but can fuel inflation.
  • Higher rates cool prices but can weaken the job market.

The two goals often conflict, operate on different timelines and are influenced by unpredictable global events. 

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More Federal Reserve: After the December rate cut, Fed Chair Jerome Powell said that the lowering of rates brought monetary policy “within a broad range of neutral.”

A neutral rate neither stimulates nor restrains economic growth.

When the Federal Reserve last paused interest rates

The Fed last paused interest rates in September 2023, holding the funds rate at 5.25% to 5.50% after a rapid tightening cycle aimed at curbing post-pandemic inflation.

The pause lasted nearly a year as policymakers wanted to see if the higher borrowing costs would tame inflation without dipping the economy into a recession.

During that pause, inflation gradually cooled and the labor market remained resilient.

The central bank resumed cutting rates in September 2025 once Fed officials became confident that inflation was moving sustainably toward the Fed’s 2% target.

January jobs report showed labor market resilience

  • The January jobs report on Feb. 11 delivered a sharp upside surprise, complicating expectations for Fed interest-rate cuts and reinforcing the view that the U.S. labor market remains more resilient than policymakers anticipated.
  • Payrolls rose by the most in more than a year to 130,000, beating estimates of 55,000.
  • Theunemployment rate unexpectedly fell to 4.3% from 4.4%.

When is the next Fed interest-rate cut?

Alongside recent indications of a stabilizing labor market, Fed officials will likely want to see further inflation progress before lowering interest rates.

“Easing inflation and limited supply ahead will extend the constructive tone in Treasuries. The soft CPI reading is supporting the front-end and reinvigorating a Goldilocks scenario for bonds right now even if inflation shows up later this year,” Alyce Andres of Bloomberg Strategists said after the CPI data was released.

Related: Hot January jobs report impacts outlook for Fed rate cuts

The Fed is cautious about cutting rates too quickly out of concern it may be sending the wrong signal about its commitment to its 2% target. Simultaneously, policymakers don’t want to damage the labor market, which showed significant signs of cooling late last year.

Jonathan Hill, head of U.S. inflation strategy at Barclays, told The New York Times that the January CPI data “lays the groundwork” for the Fed to restart cuts. 

But Hill, who penciled in cuts in June and December,  added that there was no urgency because he expected inflation would not more notably decelerate until the second half of 2026. 

“A lot of it’s going to come down to balancing slowing inflation with downside risk to the labor market,” Hill said, while adding that policymakers’ perceptions about the labor market differ greatly.

Some Fed officials wary of inflation and rate-cut bets

Interest rates could be on an extended hold while officials evaluate incoming economic data, Federal Reserve Bank of Cleveland President Beth Hammack said prepared remarks on Feb. 10. 

 “Based on my forecast, we could be on hold for quite some time,” she said.

Federal Reserve Bank of Dallas President Lorie Logan, also a voting member of the 12-member FOMC like Hammack, said Feb. 10 that she’s hopeful inflation will continue to come down.

Kansas City Fed President Jeff Schmid said in prepared remarks Feb. 11 that the central bank needs to keep rates at a restrictive level to continue to push downward pressure on inflation.

The CME Group FedWatch tool reports the likelihood of a quarter basis point cut in the upcoming 2025 FOMC meetings as:

  • March 18: 9.8% 
  • April 29: 26.4%
  • June 17: 51.3%
  • July 29: 43.1%
  • Sept. 16: 37.8%
  • Oct. 28: 34.9%
  • Dec. 9: 30.4%

Note: There is still a month of economic data, including the February jobs and CPI reports, to be released before the March FOMC meeting.

Gasoline, electricity and grocery prices drop

Americans did see some relief on the costs of everyday purchases as electricity prices ebbed and gasoline prices dropped by the most in nearly a year. Grocery prices rose the least since July.

“On balance, we found today’s report to be encouraging,” Wells Fargo & Co. economists said in a note reported by Bloomberg. “Tariff-induced price hikes probably have not fully worked their way through the data, but we are closer to the end than the beginning of this source of higher prices.”

According to January’s CPI, shelter rose 0.2% and was the largest factor in the all items monthly increase. 

  • The food index increased 0.2% as did the food at home index.
  • The food-away-from-home index rose 0.1%.
  • These increases were partially offset by the energy index, which fell 1.5%.

Indexes that increased over the month include:

  • Airline fares
  • Personal care
  • Recreation
  • Medical care
  • Communication 

Among the major indexes that decreased were:

  • Used cars and trucks
  • Household furnishings and operations
  • Motor-vehicle insurance

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