Inflation Scare

Today, January's CPI inflation rate was slightly higher than expected. But the upside surprise was enough to convince investors and traders that the Fed is less likely to cut the federal funds rate (FFR) soon or by as much as they expected over the next 12 months. The 12-month federal FFR futures rose to 4.44% today, up from 3.74% on January 15 (chart). That amounts to 4 cuts of 25bps rather than 7 cuts. We are still thinking more like 2-3 cuts during the second half of this year.

We still think inflation will fall to the Fed's 2.0% target by the end of this year. However, we are also expecting that the economy will remain relatively strong. So why should the Fed rush to lower the FFR?