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Thought of the day

Investor sentiment was cautious ahead of Friday’s release of the US consumer price index (CPI), with concerns over AI’s potential to disrupt industries continuing to weigh on market confidence. The S&P 500 is on track to register its biggest weekly loss in nearly three months, while the 10-year US Treasury yield has fallen 11 basis points so far this week.

The consensus forecast for January’s CPI calls for a year-over-year increase of 2.5% for the underlying inflation gauge, which strips out more volatile items like food and energy. This would mark the lowest level since March 2021, though projections for month-over-month growth indicate an increase to 0.3%.

The CPI report should cap a week of key economic data that collectively support our view that the Federal Reserve should resume easing from around mid-year.

Evidence that goods inflation has peaked should open the door for further easing. With inflation remaining above the Fed’s target, many policymakers are reluctant to look through tariff-driven goods inflation in the near term. But we think price pressures are likely to moderate more clearly in the coming months, allowing the Fed to cut interest rates further. Fed Vice Chair Philip Jefferson recently said he expects the disinflationary process to resume this year amid strong productivity growth, while the latest surveys by the University of Michigan and the Bank of New York Fed reflected an improvement in consumers’ expectations for inflation.

Stronger-than-expected labor data point to near-term hold, not an end to easing. The January employment data released earlier this week showed solid labor demand, with the unemployment rate edging lower to 4.3%. This jobs report lowers the odds of a near-term rate cut, but we think easing inflation and moderating growth in the coming months will gradually take priority in the Fed’s decision process. Governor Stephen Miran this week said the strength in the jobs data does not mean policymakers should hold off on additional rate cuts, adding that planned supply-side reforms such as a reduction in business regulations, along with an expectation that housing inflation will slow, should clear the way for further easing.

A more dovish personnel profile at the Fed should support additional rate cuts. While Miran is the only policymaker that has consistently dissented in the past six months, favoring larger reductions than his colleagues, the composition of the Fed Board is likely to become more dovish later this year. Fed Chair nominee Kevin Warsh’s recent comments suggest a preference for looser monetary policy, as he believes current productivity trends will be disinflationary. While uncertainty surrounding Fed personnel lingers, the seven permanent FOMC Board voters, both current and prospective, tend to be moderately more dovish than the median forecast, and they generally view the neutral rate as close to 3% or below. The FOMC has 12 members, seven of whom come from the Fed Board.

So, we believe the Fed remains on track to ease further, and we expect two 25-basis-point rate cuts between June and September. This backdrop is favorable for equities, bonds, and gold, in our view.