Markets Rally as Inflation Cools: Is the Fed Done Hiking?
The stock market just had its best week in months, and the catalyst wasn’t earnings or geopolitical news—it was good old-fashioned inflation data. January’s CPI report showed prices rising just 0.2% month-over-month, pushing annual inflation down to 2.4%, the lowest reading since May 2025.
The Federal Reserve responded by holding rates steady at their current range of 3.5% to 3.75%—but the markets didn’t care. They’re already pricing in rate cuts.
The Numbers Don’t Lie
Here’s what moved the needle:
- Headline CPI: 2.4% year-over-year (down from 2.7% in December)
- Core CPI (excluding food and energy): 2.5% annually
- Monthly increase: Just 0.2%, below the 0.3% expected
- Market pricing: Odds of a June rate cut jumped to 83%
The data caught everyone off guard. Economists were expecting inflation to stick around 2.5%, but the cooling was broader than anticipated. Shelter costs—usually the stickiest part of inflation—also showed signs of easing.
What the Fed Said (and Didn’t Say)
Fed Chair Powell held the line on rates at the January 28th meeting, marking three consecutive pauses after three 25-basis-point cuts in late 2025. But the statement acknowledged that “inflation has eased further” and the labor market “has softened somewhat.”
Fed Governor Hammack recently suggested rates could be on hold “for quite some time”—but markets aren’t buying it. Bond yields fell sharply on the CPI news, signaling investors expect the Fed to pivot sooner rather than later.
What This Means for Your Portfolio
If you’re invested in the market, here’s what matters:
- Rate-sensitive sectors — Utilities, real estate, and banks should benefit from lower rates
- Growth vs. value — The AI selloff last week created opportunities in quality tech names
- Bonds — Treasury yields falling means bond prices are heading up
- Canadian perspective — The Bank of Canada held at 2.25% but will likely follow the Fed’s lead
My Take
This feels like the beginning of a sustained rally, not a short-lived bounce. Here’s why:
First, inflation is genuinely cooling without a recession. That’s the Goldilocks scenario investors have been dreaming of. Second, the Fed has demonstrated they’re more worried about growth than inflation—they paused cuts in January not because inflation spiked, but because they wanted “more data.” Now they have it.
Third, corporate earnings have been solid. S&P 500 companies are still growing earnings, just at a more moderate pace.
The one wildcard? Geopolitics. Tariffs, wars, and policy uncertainty could always reignite inflation. But for now, the path of least resistance is up.
Time in the market, not timing the market. Stay invested.
Sources:
