Two key economic reports on tap this week are expected to show that inflation is running in place — unwelcome news for the Federal Reserve and especially bad news for investors counting on interest rate cuts to boost the value of their stocks and bonds. In fact, the combination of steady inflation and a surprisingly solid labor market has led Bank of America economists to take off the table the prospect of any Fed easing this year. That marks a huge turn of events that has made investors nervous about whether 2025 can repeat the robust market outperformance of the past two years. “After the stronger-than-expected December jobs report, we revised our Fed outlook: we no longer expect any additional rate cuts,” Bank of America economist Stephen Juneau said in a note Monday. “Inflation is stuck above target, with risks skewed to the upside, activity is strong and the labor market now appears to have stabilized.” As recently as September, Fed officials had been indicating the likelihood of a full percentage point of reductions this year. They cut that estimate in half at their December meeting. All eyes on Wall Street will be focused on consecutive releases this week from the Bureau of Labor Statistics: The producer price index, a benchmark for wholesale prices, is due out Tuesday morning, and the consumer price index is expected Wednesday. Economists surveyed by Dow Jones expect PPI to show a monthly gain in December of 0.4% for the headline reading and 0.3% for the core, which excludes food and energy. In November, PPI ran at an annual rate of 3% while the core rate was at 3.5% — both were the highest since February 2023. On CPI, which measures goods and services across the economy, the forecasts are for a 0.3% monthly rise on headline and 0.3% for core. On an annual basis, the outlook is for 2.9% and 3.3% respectively. With the Fed targeting annual inflation at 2%, all of those readings indicate the central bank has work left to do to achieve its goal. Then there’s the labor market situation, which is the other side of the Fed’s dual mandate. Friday’s BLS report on nonfarm payrolls showed growth of 256,000 jobs, while the unemployment rate edged lower to 4.1%. Moves in inflation and jobs are converging to make it tough for the Fed to justify any further easing in interest rate policy, Juneau wrote. In fact, he said, policymakers may find themselves having to tighten. “Our base case has the Fed on an extended hold, but we think the risks for the next move are skewed toward a hike,” he said. “In our view, hikes will be in play if [year-over-year] core PCE inflation exceeds 3% and long-term inflation expectations become unanchored .” The Fed uses the Commerce Department’s personal consumption expenditures price index as its primary inflation gauge and forecasting tool. Both PPI and CPI data, though, feed into that measure. Market pricing Monday put nearly 100% odds that the Fed will be on hold at its Jan. 28-29 meeting, according to the CME Group’s FedWatch measure. Traders still see a 69% chance of one quarter-point cut by the end of the year, though the odds have been rising for the central bank to stay on hold through 2025.
