Investing.com - The possibility of a Federal Reserve interest rate cut as soon as March is in play after underlying US inflation data earlier this week was softer than anticipated, according to analysts at Morgan Stanley (NYSE:MS).
Stripping out volatile items like food and fuel, the "core" consumer price index (CPI) rose by 0.2% month-on-month in December, a Labor Department report showed on Wednesday. Economists' expectations were for an increase of 0.3%.
In the wake of the release, recently waning bets that the Federal Reserve will roll out a couple of rate reductions this year were revived, although these wagers were somewhat tempered by separate numbers later in the week pointing to strong retail sales and a labor market on solid footing.
These figures indicated that, with demand showing signs of momentum and unemployment unlikely to tick higher, the probability of a sudden cooling in labor market conditions is low, the Morgan Stanley analysts said in a note to clients.
This resilience in the labor market would effectively eliminate one of the main reasons for the Fed, which previously slashed borrowing costs by a full percentage point in 2024, to resume its cutting cycle, the analysts argued.
But continued signs of easing inflation -- as suggested by the slower-than-anticipated core CPI data -- may have kept "the door open" for a Fed drawdown in March, they said.
In particular, their forecast for the monthly core personal consumption expenditures (PCE) price index, a key inflation gauge watched closely by Fed rate-setters, is now four basis points below their initial estimates prior to this week's deluge of data.
"We expect further progress ahead, with a step down in the 12-month pace of core PCE inflation in January," the analysts wrote, adding that upward pressure on inflation in the first quarter more broadly may also be less intense than it was in the year-ago period.
However, they flagged that US President-elect Donald Trump's proposed sweeping import tariffs on friends and foes alike could take a March cut "off the table", especially if the levies come sooner than anticipated or are higher than projected.