U.S. markets rallied on Wednesday after February’s inflation report came in softer than anticipated, bolstering expectations for Federal Reserve rate cuts while investors reassess the economic impact of President Donald Trump administration’s policies.
What Happened: Allianz Chief Economic Advisor Mohamed El-Erian noted on X that “US CPI was softer than the consensus forecasts,” with monthly inflation at 0.2% for both core and headline figures versus the expected 0.3%. Annual inflation eased to 3.1% for core and 2.8% for the headline, below forecasts of 3.2% and 2.9% respectively.
“Markets will see the numbers as warranting higher optimism about a ‘Fed Put’ at a time when their hope for a ‘Trump Put’ has been shaken,” El-Erian wrote, referencing market expectations that the Fed would intervene if economic conditions deteriorate.
The Consumer Price Index report marked the first decline after four consecutive months of rising price pressures. The shelter index climbed 0.3%, contributing nearly half of February’s overall monthly increase, while travel-related items were soft, with airline fares dropping 4.0%.
Major indices responded positively to the inflation data, with the SPDR S&P 500 ETF Trust SPY up 0.53%, and the Invesco QQQ Trust QQQ gaining 1.13% at Wednesday’s close.
Why It Matters: Following the data release, traders fully priced in three Federal Reserve rate cuts in 2025, according to the CME FedWatch Tool, as policymakers weigh inflation progress against signs of economic deceleration.
Bill Adams, chief economist for Comerica Bank, said inflation is moving in the “right direction,” making Fed rate cuts more likely. However, he cautioned that “the range of outcomes feels wider than usual given the unpredictability of the policies affecting prices and the job market.”
The economic outlook has shifted dramatically in recent weeks amid concerns over Trump’s trade and fiscal policies. Investors who initially predicted faster growth under Trump have grown cautious, with bond markets signaling recession fears as two-year Treasury yields have fallen significantly since mid-February.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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