Investing.com - The Federal Reserve is not anticipated to slash interest rates again before June following a softer-than-anticipated core inflation reading earlier this week, according to analysts at UBS.
Headline consumer prices increased by 0.4% last month, accelerating slightly from 0.3% in November, the Labor Department's Bureau of Labor Statistics said on Wednesday. In the twelve months through December, the CPI climbed by 2.9%, faster than the prior reading of 2.7%.
Meanwhile, the so-called "core" measure, which strips out volatile items like food and fuel, edged up by 0.2% month-on-month and 3.2% year-over-year. Economists had estimated the numbers would match November's pace of 0.3% and 3.3%, respectively.
The three main averages on Wall Street all surged in the wake of the report, notching their biggest daily percentage climbs since November 6, as hopes for more Fed rate reductions this year were bolstered. Fed officials noted that while uncertainty swirls around the policies of the incoming Trump administration, the figure helped the outlook for inflation.
US government bond yields -- which had recently touched multi-month highs, weighing on stocks -- also retreated. In a note to clients, the UBS analysts led by Mark Haefele said the release "appeared to come as a relief to investors" who had been scaling back their expectations for Fed cuts in 2025.
"[T]he softer inflation figures are a reassuring sign for markets, particularly after a period of elevated bond yields and retreating equity prices," the analysts wrote.
Still, they argued that because the core consumer price reading was "only fractionally lower" than the consensus forecast and last week's employment report pointed to a "robust" labor market, overall US economic activity has remained "strong by historical standards."
"Against this backdrop, we don’t expect the latest inflation release to notably alter the Fed’s monetary policy trajectory," the analysts said. They reiterated their prediction that the Fed -- which lowered rates by a full percentage point last year -- will roll out another 50-basis points in cuts in 2025, although they flagged the drawdowns "may only resume closer to the middle of the year."
The resilience of the data has also given them "no reason" to expect the Fed will alter rates at its next two-day meeting later this month, the analysts said.