Fed likely to stay on hold despite strong CPI, rate cuts expected in Q3

TD economists suggest that while the latest Consumer Price Index (CPI) report is not encouraging from the Federal Reserve’s perspective, it should not be viewed as a signal of sustained inflationary pressures. The firm cautions against extrapolating January’s strength into the medium-term inflation outlook, emphasizing that the key takeaway is that the data will likely keep the Fed on the sidelines for now—aligning with TD’s long-standing view.

Despite the inflation surprise, TD maintains that the Fed will preserve its easing bias, remaining in a wait-and-see mode as it looks for further clarity from upcoming economic data. The firm continues to expect the Federal Open Market Committee (FOMC) to begin cutting rates in the third quarter of 2025. While the bar for rate hikes remains high, TD acknowledges that policymakers will need more confidence that inflation is sustainably cooling before committing to any easing.

The data can be found from here:

• Forexlive Americas FX news wrap 12 Feb: Higher US CPI pushes yields higher. USD is mixed

Earlier responses posted:

Bank of America: Strong CPI underscores Fed’s caution, rate hikes back in discussion

• Morgan Stanley hasn’t changed its Federal Reserve forecast despite strong US CPI report
• Goldman Sachs revises core PCE inflation forecast higher after CPI report

This article was written by Eamonn Sheridan at www.forexlive.com.