Fed officials have been warning that more time is needed before rate cuts can begin. A hotter-than-expected inflation reading Tuesday reinforced that cautious view.
Investors are starting to listen. Markets are now pricing in a nearly 80% chance the Fed cuts rates in June, dialing back previous bets the central bank would begin cutting rates in May.
That shift followed an announcement Tuesday from the Bureau of Labor Statistics that the Consumer Price Index (CPI) rose 0.3% over last month and 3.1% over the prior year in January.
Both measures were higher compared to economists' forecasts. On a "core" basis, which strips out the more volatile costs of food and gas, prices in January climbed 0.4% over the prior month and 3.9% over last year.
The core figure is still double the Fed's target of 2%.
"The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower, allowing the Fed to begin easing rates sooner rather than later," said Quincy Krosby, chief global strategist for LPL Financial.
"Across the board numbers were hotter than expected, making certain that the Fed will need more data before initiating a rate-cutting cycle."
The Fed "has a lot to think about," Sahm Consulting founder Claudia Sahm told Yahoo Finance Tuesday.
Fed officials have been trying to send signals over the last month and a half that cuts will likely happen later than some investors might expect.
Fed Chair Jay Powell made that clear in a Jan. 31 press conference, saying that officials want to see more good data and get greater confidence about the direction of inflation before easing monetary policy.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
"It’s not that we’re looking for better data … We’re looking at continuation of the good data," he said. "We have six months of good inflation data. The question really is, that six months of good inflation data, is it sending us a true signal that we are, in fact, on a path — a sustainable path — down to 2% inflation?"
Some economists have said the Fed will likely feel more confident once it has a full year of inflation data showing a drop toward 2%. That would mark the month of June.
Investors began the year thinking the Fed would move much more aggressively and predicted the first cut would happen in March. They had those hopes dashed when Powell essentially took it off the table at his Jan. 31 press conference and in a Feb. 4 appearance on the TV program "60 Minutes."
A chorus of other Fed officials also urged patience last week in a series of speeches. Richmond Fed President Tom Barkin said it would be smart for the central bank to "take our time" on rate cuts despite "remarkable" data showing that inflation is dropping.
Boston Fed President Susan Collins and Cleveland Fed President Loretta Mester also said last week they need to see more to feel confident inflation is heading back to the central bank’s 2% target, predicting that would likely happen "later this year."
Atlanta Fed President Raphael Bostic told CNN Monday that he expects a cut "sometime in the summertime."
Shelter prices, which officials are closely watching, contributed to two-thirds of the monthly increase reported Tuesday. At the same time, services excluding shelter prices, which tend to take a while to drop, remained sticky, sitting at 3.6% last month, in line with the 3.5% range over the past couple of months.
While CPI didn’t show much sign of progress last month, the Fed’s preferred inflation measure — the "core" Personal Consumption Expenditures index that excludes volatile food and energy prices — clocked in at 2.9% for the month of December, showing more improvement than CPI. Officials will get another reading on that gauge at the end of this month.
The emphasis on caution by the Fed means the central bank is even more likely to push out any consideration of interest rate cuts until closer to the second half of an election year.
That places it on a collision course with figures on both sides of the political divide who are ready to attack Powell if the cuts come too soon or too late for their liking.
Those critics include Republican front-runner Donald Trump, who has said of Powell that "it looks to me like he's trying to lower interest rates for the sake of maybe getting people elected."
Sahm told Yahoo Finance Tuesday that "it's going to be a painful year for the Fed. They are already getting it on all sides."
But she said she expects Fed officials to put their heads down and "do their job."
Read more about the latest inflation data and what it means for markets:
Inflation: Consumer prices rise 3.1% in January, defying forecasts for a faster slowdown
Hot inflation reading reinforces the Fed's cautious approach to rate cuts in 2024
Cost of eating out continues to rise, a potential hit to restaurant chains
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