US Fed rate cut expectations rise after inflation shows falling trend

Market sentiments seem to have improved after the release of the latest inflation numbers. Weaker inflation data increases the likelihood that the Fed may cut rates later this year to support growth.

The annual inflation rate eased to 2.8% in February from 3% in January, below the expected 2.9%, while monthly CPI growth slowed to 0.2%, also under forecasts.

The annual core consumer price inflation rate in the United States, which excludes items such as food and energy, eased to 3.1% in February 2025, from 3.3% in the prior month and below market expectations of 3.2%. It is the lowest figure since April 2021.

This weaker inflation data increases the likelihood that the Fed may cut rates later this year to support growth. However, new trade tensions add uncertainty. Following the implementation of Trump’s steel and aluminum tariffs, the EU announced counter-tariffs on $28.3 billion worth of US goods starting in April.

Trump’s ‘Reciprocal Tariffs’ are yet to be implemented from April 1, 2025. A reciprocal tariff is the similar rate that will be levied on US imports in response to tariffs imposed by another country.

“The Federal Reserve must act now and cut rates. February’s inflation report has given policymakers the cover they need to cut rates,” says Nigel Green, CEO, deVere Group.

“Trump’s tariff threats complicate the picture further. The trade war he is reigniting threatens to push up consumer prices while simultaneously weighing on growth. This dangerous mix—pockets of inflationary pressure alongside an economic slowdown—puts the Fed in a precarious position. Rate cuts must come sooner rather than later to prevent deeper damage. And we expect the Fed will move on this as the policymakers know the longer they wait, the more it risks a policy error that could tip the economy into a downturn,” adds Green.

The yield on the 10-year US Treasury note fell to below 4.27% on Wednesday from the two-week high of 4.33% touched earlier in the session after softer than expected inflation data added room for the Federal Reserve to address growth concerns this year.

The headline and core inflation rates fell more than expected during February, raising hopes of disinflation after a series of stubbornly high readings, aligned with bets that the Fed will deliver multiple rate cuts this year.

Calls for less restrictive policy gained momentum this month after a disruptive economic policy and a bath of U-turns by President Trump drove markets to cut growth expectations and pile onto Treasuries across the curve, driving the yield on the 10-year note to fall to a four-month low of 4.16% on March 3rd.

Rate futures now reflect that the market has positioned for three 25bps rate cuts by the Fed this year.

Powell’s press conference and the March FOMC meeting will provide clarity on whether the US Fed is committed to controlling inflation and will lower or hold off on raising rates in the face of a declining inflation trend.