Inflation Spike Sparks Dollar Rally: Yields Jump, Bitcoin And Stocks Slide As Interest Rate Cut Doubts Grow

A hotter-than-expected January inflation report triggered sharp market reactions in early trading Wednesday, as investors dialed back their expectations for Federal Reserve rate cuts.

Traders pushed the first anticipated Fed rate cut to December 2025, while the second cut is now priced in no earlier than September 2026, as per CME FedWatch.

A single rate cut in 2025 is also emerging as the most likely scenario according to betting odds as tracked by the CFTC-regulated Kalshi platform.

A Hot Inflation Reading Derails Fed Rate Cut Hopes

The Consumer Price Index (CPI) rose 3.0% year-over-year, slightly above both the prior reading and expectations of 2.9%. This marks the fourth consecutive increase in annual inflation.

The monthly reading was even more alarming as CPI surged 0.5%, the largest increase since August 2023, and the third straight month of accelerating price pressures.

Among major CPI components, fuel oil saw the biggest jump, rising 6.2% month-over-month.

“The index for meats, poultry, fish, and eggs rose 1.9 percent over the month, as the index for eggs increased 15.2 percent. This was the largest increase in the eggs index since June 2015 and it accounted for about two thirds of the total
monthly food at home increase,” the Bureau of Labor Statistics said.

Yet, the rise in inflation was not solely driven by energy and food costs.

When excluding food and energy, core CPI increased 3.3% year-over-year, up from the previous 3.2% and exceeding forecasts of 3.1%. On a monthly basis, core CPI climbed 0.4%, its highest reading since March 2024, and above consensus estimates of 0.3%.

“If the Fed were truly committed to its 2% inflation target, market participants would be discussing a potential rate hike and not just a longer pause in the cutting cycle,” commented economist Mohamed El Erian.

Peter Schiff took a more extreme stance: “The Fed is way too loose. At a minimum, the Fed needs to do an inter-meeting 200 basis point rate hike today.”

In contrast, Robin Brooks, a senior fellow at the Brookings Institution, highlighted that January inflation readings have tended to be strong post-COVID, attributing the uptick to “noise and residual seasonality.”

“My best proxy for underlying inflation is “core” services and that looks well-behaved,” Brooks said.

Before the CPI report, President Donald Trump called for lower interest rates in a Truth Social post, indicating that such a move would go “hand-in-hand” with tariffs.

Markets React: Stocks Fall, Dollar And Yields Surge

The U.S. dollar index, tracked by the Invesco DB USD Index Bullish Fund ETF UUP, was the major standout winner amid the higher-than-expected inflation reading, with the greenback gauge rallying 0.5%, eyeing the strongest session since early January.

Treasury yields soared by 10 basis points on the 10-year maturity amid expectations of tighter Fed policies. The popular iShares 20+ Year Treasury Bond ETF TLT tumbled by 1.5% in the premarket, potentially heading towards the worst day since late 2024.

Higher yields sent stocks lower across the board. Contracts on the S&P 500 fell 1%, while tech stocks in the Nasdaq 100 tumbled 1.1%. Small caps underperformed, with the Russell 2000 down 1.5%.

Sector-wise, the Technology Select Sector SPDR Fund XLK, was down by 1.5%. Shares of Nvidia Corp. NVDA fell over 2%.

Gold dipped by 0.3%, while oil prices fell 1.2%.Sentiment in cryptocurrency market weakened with Bitcoin BTC/USD weakening by over 1% below $95,000.

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