Key takeaways
- The January Consumer Price Index (CPI) report surprised to the upside, but core PCE inflation trends continue to moderate.
- J.P. Morgan Research looks for the Fed to hold steady until June before cutting twice, bringing the target range for the policy rate to 3.75–4% by the end of the third quarter.
- Firmer-than-expected jobs and inflation data could raise the risk of a rate hike in the coming months. An unexpected deterioration in the labor market, on the other hand, could bring about a more protracted series of cuts.
The Federal Open Market Committee (FOMC) paused its cutting cycle at its January meeting, opting instead to hold rates steady between 4.25% and 4.5%. The decision was attributed to a resilient job market and sticky inflation, which point to an economy that’s still in good shape.
With the January Consumer Price Index (CPI) report surprising to the upside, could the Fed stay on hold through 2025? When will interest rates go down?
“Elevated inflation expectations should reinforce the Fed’s extended pause in its rate cutting campaign.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
What’s the US inflation outlook?
Inflation prints came in hot in January, with the headline CPI rising 0.5% month-over-month — largely driven by higher food and energy prices. The core CPI reading, which excludes food and energy, also increased by 0.4%.
However, the Fed’s preferred barometer, the Personal Consumption Expenditures (PCE) price index, painted a more positive picture. Both the headline PCE and core PCE rose 0.3% month-over-month in January, largely in line with market expectations.
“Much of the strength in the core CPI was in categories like used vehicles and vehicle insurance, which either have smaller weights or use different concepts than the PCE,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “Consequently, we continue to see an avenue for inflation to moderate slightly in 2025, and the Fed should remain patient while still having an opportunity to cut later in the year.”
Nevertheless, consumers are worried about the impact on their finances. According to a University of Michigan survey on consumer sentiment, longer-term inflation expectations jumped to 3.5% in February, near the highs seen during the COVID-19 pandemic. In addition, consumer perceptions of buying conditions deteriorated markedly in February on the back of tariff announcements.
“Overall, elevated inflation expectations should reinforce the Fed’s extended pause in its rate cutting campaign,” Feroli said.
The PCE paints a more favorable picture of the US inflation outlook
Core PCE readings have come in lower than core CPI readings since February 2024.
When could the next Fed rate cut be?
With inflation still elevated, J.P. Morgan Research looks for the Fed to hold steady until June before cutting twice, bringing the target range for the policy rate to 3.75–4% by the end of the third quarter of 2025.
During his recent appearance before Congress, Fed chair Jerome Powell expressed optimism about the U.S. economy, indicating that the FOMC was in no hurry to cut rates — a stance consistent with market pricing. He also reiterated that further rate cuts would be contingent on inflation cooling or the labor market weakening.
Firmer-than-expected jobs and inflation data could raise the risk of a rate hike this year. “We think a pivot toward tightening would likely be preceded by a sense that the labor market was again getting out of balance, thus risking a wage-price spiral. An unemployment rate back below 4% and a vacancy-unemployment ratio above 1.3 could get the Committee to talk about rate hikes,” Feroli noted. On the other hand, if weakness were to reappear in the labor market, the FOMC could resume its cutting cycle.
“The basis for keeping rates steady is based on both the trajectory of the incoming economic data as well as the uncertain effects of government policy, particularly stemming from upside risks to inflation from trade and immigration,” Feroli said. “The vast majority of market participants continue to believe that the current level of rates remains restrictive, and is thus appropriately calibrated to gradually return inflation to target.”
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