Fed seen waiting longer to cut rates as inflation stays elevated

By Ann Saphir

Feb 13 (Reuters) – Federal Reserve policymakers waiting for more evidence of easing price pressures before they cut interest rates may find themselves waiting a bit longer, after a government report on Tuesday showed consumer inflation stayed elevated last month.

The consumer price index was up 3.1% in January from a year earlier, down from its 3.4% pace in December but more than the 2.9% economists polled by Reuters had been expecting. Underlying core inflation, which strips out energy and food prices, rose 3.9% from a year earlier for a second straight month.

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That stickiness is not going to add to Fed confidence that inflation, while down from its 40-year-high in mid-2022, is truly on a path to its 2% goal.

The Fed last month kept its policy rate in the 5.25% to 5.5% range, where it has been since last July, and while Fed Chair Jerome Powell noted progress, he also said March, when the policymaking committee next meets, would likely be too soon for the Fed to be sure it has won the fight with inflation.

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With the job market still strong – U.S. employers added more than 350,000 jobs in January, a report earlier this month showed – still-too-high inflation gives the U.S. central bank little reason to rush on rate cuts.

After Tuesday’s inflation report, traders previously betting on a rate cut at the Fed’s April 30-May 1 meeting now see June as more likely.

“If this keeps up with another month or two of inflation staying high, you can kiss a June (rate cut) goodbye and we’re probably looking at September,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “It’s a hotter-than-expected report and it’s part of what the Fed has been alluding to when it says it’s too early to say that inflation has been beaten.”

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Speaking after the report both U.S. Treasury Secretary Janet Yellen and National Economic Council director Lael Brainard, both former top-ranking officials at the central bank, said they continued to see good progress on inflation.

But while some of the more prominent pocketbook items did ease – gasoline prices fell 3.3% over the month – others, notably food, continued rising.

A big part of the CPI’s strength in January was an acceleration in shelter costs, up 0.6% on the month from 0.4% a month earlier.