Inflation Data Batters Markets as Investors’ Hopes for a Spring Rate Cut Dim

Tuesday’s inflation report threw cold water on investors’ expectations for a rate cut in the spring, sending stocks lower.

The consumer price index (CPI) showed that inflation remained stubborn in January, clocking in at 3.1% year-over-year. The report, which was released before the bell Tuesday, alarmed investors, sending stocks down across the board. The Nasdaq Composite ended 1.8% lower, while the Dow Jones Industrial Average fell 1.4%, its worst day since March 2023. The S&P 500 also slid 1.4%.

Sticky inflation data makes the Federal Reserve’s next steps in the fight against inflation more complicated.

Before the report, investors pegged more than a 60% chance that the Federal Reserve would cut rates at least once by their meeting in May. As of late Tuesday, that possibility had dropped to about 35%, according to CME Group’s FedWatch tool, which forecasts interest rate movements based on fed funds futures trading data.

“The data really put a dent in the moderating inflation narrative that has taken hold in the markets and among some Fed officials,” BMO Chief U.S. Economist Scott Anderson wrote in an analysis Tuesday.

Fed officials have stressed they want to be confident inflation is sustainably making its way to their 2% annual goal. While economists said this report doesn’t waylay that progress, it could push back the point at which rates will be cut.

“Today’s report is a reminder that the road back to 2% inflation likely will have some potholes, and it reinforces the hawks on the FOMC [Federal Open Market Committee] who have expressed skepticism that an imminent easing of policy is warranted,” wrote Wells Fargo economists Sarah House and Michael Pugliese.

In other markets, the yield on the 10-year Treasury note jumped to a 2-month high above 4.3%. The U.S. dollar soared along with yields.

UPDATE: This article has been updated after initial publication to reflect closing levels for major U.S. stock indexes.