Since the significant inflation surge began in 2021, the Federal Reserve has grappled with the challenge of bringing inflation down to its targeted rate of 2%. In a bid to counteract the overheated economy, the Fed raised its policy interest rate by an impressive 525 basis points throughout 2022 and 2023. However, as inflation began to show signs of retreat, the central bank was able to ease some restrictions, initiating a series of rate cuts that have so far totaled 100 basis points since September of last year.

Despite this backdrop, the American economy remains robust, prompting the Fed to pause its rate reduction strategy in January, as officials sought time to evaluate the impact of the new government’s changes on trade, immigration, and tax policiesThe question of when, or indeed whether, the Fed would begin to cut rates again remains unanswered, particularly as market participants remain eager for progress on tariff and immigration matters.

According to Daniel Doderer, Chief Economist and Head of Research at Flack Global Metals, the inflation levels within the U.S. service sector have yet to return to pre-pandemic levelsThis comes as a result of illegal immigration deportations and a decrease in immigration for both services and goods, leading to a diminished workforce that is driving wages up to fill job vacancies. “I believe the Fed is presently in a very advantageous position to hold steady for the time being,” Doderer explained. “We are transitioning from an abundant supply and healthy demand labor market to a constrained supply one, with demand remaining unchanged and possibly increasingThis isn’t exactly great news for future rate cuts.”

Doderer further elaborated that due to inflation still being above target levels, coupled with a strong economic growth potential, there is "no necessity for rate cuts." He added, “Our internal expectation is that the Fed will not lower rates this year, given that inflation remains under pressure, leaving us with just a slight tilt toward a potential reduction compared to an increase.”

The mere threat of tariffs can lead businesses to raise prices

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Doderer highlighted that when companies are formulating business plans, the most straightforward conclusion tends to be that uncertainty about cost fluctuations prompts them to increase pricesEven without tariffs, price pressures persistHe noted that while commodity prices have remained in a deflationary state, housing inflation has shown a tendency to be “sticky,” and various other costs, including airline fares, have not recededThis indicates that the desire for broader progress in service-based disinflation has not been metMoreover, renewed optimism regarding manufacturing activity could potentially exacerbate inflation in the goods sector.

Upcoming data on inflation alongside comments from Fed Chair Jerome Powell could offer insight into the Fed’s trajectory regarding interest ratesThe Consumer Price Index (CPI) for January is set to be released on Wednesday, with Wall Street economists anticipating a year-over-year increase of 2.9%, which would hold steady with the previous month’s statisticsThe core CPI, which excludes food and energy prices, is expected to rise 3.1% year-over-year, slightly down from the previous figure of 3.2%.

Additionally, data regarding the Producer Price Index (PPI) is also expected on WednesdayEconomists forecast that the PPI will show a year-over-year increase of 3.2%, down from the prior 3.3%, while the core PPI is expected to rise 3.3%, lower than the previous 3.5%.

Adding to the anticipation is the release of what is colloquially known as “terrifying data” on retail sales for January, set for this upcoming FridayEconomists predict a slight month-over-month decline of 0.1%, in contrast to the previous month’s increase of 0.4%. If the inflation figures suggest persistent inflation or if retail sales indicate a robust consumer support, this could further diminish market expectations of impending rate cuts from the Fed.

Analysts point out that previous signs of persistent inflation have intensified market speculations that interest rates may remain unchanged for several months

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