The U.S. inflation landscape has seen recent shifts, with core inflation showing modest signs of easing. However, this trend is unlikely to prompt the Federal Reserve to cut interest rates in the immediate future. The latest data on inflation and interest rates provide insights into how these economic indicators might influence financial markets and consumer borrowing costs.
In January 2025, the U.S. inflation rate rose to 3%, up from 2.9% in December 2024, exceeding market forecasts. Core inflation, which excludes volatile food and energy prices, unexpectedly increased to 3.3% annually. This rise in inflation is partly attributed to higher energy costs and rebounding prices for used cars and trucks.
The Personal Consumption Expenditures (PCE) price index, a key inflation gauge favored by the Federal Reserve, showed an annual growth rate of 2.5% in January, with core PCE at 2.6%. These figures align with expectations and suggest that inflation remains a concern for policymakers.
Despite the easing in core inflation, economists believe that the Federal Reserve is unlikely to cut interest rates in the near term. The Fed has been cautious, pausing rate cuts after a series of reductions in late 2024. Financial markets are pricing in potential rate cuts later in the year, with more than a 75% probability of at least two cuts by December 2025.
The Fed’s decision to hold rates steady is influenced by the resilient U.S. economy and ongoing inflation concerns. Analysts like RBC’s Nathan Janzen note that while inflation has slowed from its peak, it remains higher than desired, limiting the pace of further reductions. The Fed aims to keep interest rates higher to offset inflationary pressures and a large government budget deficit.
The relationship between the Fed’s interest rates and mortgage rates is complex. While lower federal funds rates typically lead to lower mortgage rates, other factors such as market expectations and economic conditions can influence mortgage pricing. Recent expectations of modest Fed rate cuts have contributed to slightly lower 30-year mortgage rates.
U.S. inflation data also has implications for other economies, particularly Canada. The direction of U.S. Treasury yields, influenced by inflation, impacts Canadian bond yields, which in turn affect fixed mortgage rates. As noted by Bruno Valko, VP of National Sales at RMG, U.S. inflation is a key driver of Canadian bond yields and, by extension, mortgage rates.
The current inflation landscape and the Federal Reserve’s cautious stance on interest rates suggest that significant changes in monetary policy are unlikely in the short term. However, as economic conditions evolve, further rate adjustments remain possible.
