QUESTION:
What is the current sentiment and forecast for interest rates and inflation in the US?
RESPONSE:
The current sentiment and forecast for interest rates and inflation in the US reflect a complex economic environment. Inflation expectations among consumers have risen, with the University of Michigan’s consumer sentiment survey indicating that inflation is expected to hit 4.3% in the year ahead, the highest such reading since 2023[1][2][3]. This has contributed to a decline in consumer sentiment, which has reached a seven-month low due to expectations of high inflation returning within the next year[4].
The Federal Reserve is facing pressure to manage inflation, which is currently above its 2% target. The Fed’s preferred inflation metric, the core PCE, is projected to be 2.5% by the end of 2025, indicating slow progress toward the 2% target[5]. Despite this, the Fed has signaled a cautious approach, maintaining current interest rate levels amid uncertainty over new policies and lingering inflation[6][7].
Overall, the sentiment is one of concern over inflationary pressures, with market participants and consumers expecting continued inflation challenges, which could influence the Fed’s interest rate decisions throughout the year[8][9].
References
[1] US Stocks Tumble On Tariff, Inflation Fears [Barron’s]
And the University of Michigan’s consumer sentiment index indicated that sentiment fell, while year-ahead inflation expectations rose to 4.3 percent. https://www.barrons.com/news/us-stocks-tumble-on-tariff-inflation-fears-635736c5
[2] Stock market today: Wall Street slips as consumers get more worried about inflation, Amazon slides
The preliminary report from the University of Michigan said U.S. consumers are expecting inflation in the year ahead to hit 4.3%, the highest such reading since 2023.
[3] Stock market today: Asian shares trade mixed after Wall Street slumps on Trump tariff worries
The preliminary report from the University of Michigan said U.S. consumers are expecting inflation in the year ahead to hit 4.3%, the highest such forecast since 2023.
[4] Markets are betting Trump’s bark is worse than his bite. Consumers are not [CNN]
On Friday, a preliminary reading of US consumer sentiment sank to a seven-month low because of expectations that high inflation will return within the next year. https://us.cnn.com/2025/02/11/business/trump-tariffs-inflation-nightcap/index.html
[5] Inflation Stayed At 2.8% In December, Per Fed’s Preferred Metric—‘Further Progress’ Needed For Rate Cuts [Forbes]
Median forecasts from Fed policymakers last month called for slow progress toward 2% inflation, projecting 2.5% core PCE inflation by the end of 2025, 2.2% by the end of 2026 and finally 2% by 2027. https://www.forbes.com/sites/dereksaul/2025/01/31/inflation-stayed-at-28-in-december-per-feds-preferred-metric-further-progress-needed-for-rate-cuts
[6] Stock market today: Wall Street points to small losses in premarket following another record high
The Fed has signaled a more cautious approach this year amid uncertainty over new policies implemented by President Donald Trump’s administration and lingering inflation that has remained above the U.S. central bank’s 2% target.
[7] Trump wants interest rate cuts. The market isn’t buying it. [NBC News]
Following the inflation report, market bets implied that the probability of the Fed holding current interest rate levels through 2025 rose from 20% to 29%. https://www.nbcnews.com/business/economy/trump-wants-interest-rate-cuts-investors-not-buying-it-rcna191873
[8] Stock market today: Worse inflation data hits Wall Street, and Dow drops 400 points
The inflation report suggests not only that pressure on U.S. households’ budgets is amplifying but also that traders on Wall Street were correct to forecast the Federal Reserve will deliver less relief for Americans through lower interest rates this year.
[9] Stock market today: Wall Street ticks higher to recover some of last week’s tumble
Recent reports have shown that consumer sentiment is weakening as expectations for inflation worsen, in part because of tariffs and other policies pushed by President Donald Trump.
