S&P 500: Powell’s Caution and Upcoming CPI Report Keep Markets on Edge

Markets Eye CPI Data as Tariffs and Fed Policy Cloud Outlook

Traders are focused on Wednesday’s Consumer Price Index (CPI) report, with inflation data set to influence Federal Reserve policy expectations. While markets have been preoccupied with President Donald Trump’s recent tariff measures, today’s CPI release shifts attention to core economic fundamentals. With inflation still above the Fed’s 2% target and tariffs threatening further price pressures, traders are weighing the likelihood of interest rate cuts in the coming months.

Inflation Expected to Hold Steady

Consensus forecasts expect January’s CPI to rise 0.3% month-over-month, keeping the annual inflation rate unchanged at 2.9%. Core CPI, which excludes volatile food and energy prices, is projected to increase 3.1% annually, slightly down from December’s 3.2%. While inflation has cooled from its 2022 peak, progress toward the Fed’s 2% goal has slowed.

A resilient labor market is complicating the inflation picture. Strong wage growth and steady consumer spending have given the Fed room to maintain its current policy stance. January’s inflation data could determine whether rate cut expectations for 2025 remain intact or face further downward revisions.

Tariffs Pose New Inflation Risks

Trump’s newly implemented tariffs add a fresh layer of uncertainty to inflation projections. Economists at Deutsche Bank estimate that the tariffs could push inflation higher by up to two percentage points in 2025, depending on how much of the cost is passed on to consumers. While immediate CPI data won’t reflect these impacts, traders will be watching closely for signs that imported goods prices are beginning to rise.

Fed Chair Jerome Powell has acknowledged the uncertainty surrounding trade policy, noting in his recent testimony that tariffs could influence inflation outcomes. However, he reiterated the Fed’s patient stance, signaling no rush to adjust interest rates.

Fed Rate Cut Expectations Diminishing

With inflation still elevated and the economy showing resilience, traders are scaling back expectations for rate cuts. Bond futures now reflect just an 8.5% chance of a 25-basis-point cut in March, down from 14% a week ago. The odds of a June cut remain near 43%, while some analysts suggest the Fed may not cut rates at all this year.

Dallas Fed President Lorie Logan recently reinforced the central bank’s cautious stance, stating that even if inflation falls toward 2%, strong labor market conditions could justify keeping rates steady. Meanwhile, Bank of America economists have revised their forecast, now predicting no rate cuts for the remainder of the year.

Stock Market Reaction and Trading Outlook

Stock futures were relatively flat early Wednesday as traders awaited the CPI report. S&P 500 futures dipped 0.1%, while Nasdaq 100 futures slipped 0.08%. Dow Jones Industrial Average futures declined by 34 points, reflecting cautious sentiment.

On Tuesday, markets remained subdued following Powell’s testimony before the Senate Banking Committee, where he emphasized that the Fed was in no rush to cut rates. The S&P 500 ended the day near the flatline, while the Nasdaq Composite fell nearly 0.4%. The Dow outperformed, gaining 0.3%.

Investors are also monitoring corporate earnings, with key reports expected from CVS Health, Robinhood, Cisco Systems, and MGM Resorts. A hotter-than-expected CPI reading could push bond yields higher and weigh on equities, while a softer report may renew optimism for mid-year rate cuts. With tariff concerns and inflation risks still in play, traders should prepare for continued market volatility.

More Information in our Economic Calendar.