Traders are pricing in higher odds of multiple interest rate cuts by the Federal Reserve this year after a surprise drop in overall inflation to 2.4% in January from the previous 2.7%. Core inflation, excluding food and energy, also decreased to 2.5%. Some Fed policymakers had concerns about high inflation, especially after a strong January jobs report.

The Federal Open Market Committee voted 10-2 to hold interest rates steady at 3.50% to 3.75% in January. Delayed rate cuts could mean higher borrowing costs for consumers. Fed Governors Stephen Miran and Christopher Waller dissented in favor of a 25 basis-point cut due to labor market softening, marking the FOMC’s first pause since July 2025.

The latest data suggests a pause in interest rate cuts as the Fed evaluates inflation and labor market indicators. Fed officials will likely want to see further progress on inflation before making any rate adjustments. The CME Group FedWatch tool reports a growing likelihood of quarter basis point cuts in upcoming FOMC meetings.

Americans saw relief on everyday costs as electricity and gasoline prices dropped, while grocery prices rose less. The food index and food-at-home index each increased by 0.2%. Airline fares, personal care, recreation, medical care, and communication indexes rose, with energy index falling by 1.5%.

Indexes that increased over the month include airline fares, personal care, recreation, medical care, and communication. Among the major indexes that decreased were energy costs. This data is encouraging for the Fed to potentially restart rate cuts, with expectations of further inflation deceleration in the second half of 2026. Fed officials are cautious about sending mixed signals on inflation while balancing labor market concerns.

Read more at Yahoo Finance: Traders pivot Fed rate cut bets after CPI surprise