US Inflation Ticks Higher, but Markets See the Fed Sitting on Its Hands

US inflation rose slightly in December, with the Consumer Price Index (CPI) showing an annual rate of 2.7%, unchanged from the previous month and in line with market expectations. The core CPI, which excludes volatile food and energy prices, came in at 2.6%, slightly below forecasts. This result reinforced the market's belief that inflation is stabilizing, though it remains above the Federal Reserve's 2% target.

The Federal Reserve is currently facing political pressure from the Trump administration, which has raised concerns about inflation and interest rates. However, the central bank has maintained a cautious approach, keeping interest rates steady in recent months and signaling no immediate plans for cuts. Fed Chair Jerome Powell has been placed under investigation, which he has publicly attributed to political pressure.

Bitcoin (BTC) and other assets showed varied responses to the inflation data. Bitcoin rose to near $93,000 but remained range-bound as investors awaited further macroeconomic signals. Analysts noted that the price remained above key technical levels but was under pressure from a tightening market range.

Why Did This Happen?

The Trump administration launched a new round of mortgage-backed securities (MBS) purchases in an effort to stabilize the housing market. These purchases, which began with a $3 billion initial round by Fannie Mae and Freddie Mac, aim to balance the Fed's ongoing MBS balance sheet reduction. By matching the pace of the Fed's MBS runoff, the administration hopes to indirectly reduce mortgage rates and improve affordability, though Treasury Secretary Scott Bessent acknowledged that direct rate impacts are unlikely.

The Fed has been reducing its MBS holdings for over two years, at a rate of around $15–17 billion per month. This reduction has contributed to elevated mortgage rates and a broader affordability challenge in the housing market. Despite these efforts, the 30-year fixed-rate mortgage average remains at 6.2%, far above the 3% levels seen during the pandemic.

How Did Markets React?

The market responded to the CPI data with a cautious outlook. The S&P 500 hit new all-time highs after the data release, reflecting growing optimism about the economy's resilience amid relatively moderate inflation. Investors are now focusing on the Federal Reserve's upcoming policy decisions, with the next meeting scheduled for January 28.

Bitcoin showed a modest upward move following the CPI release, with a 2.01% gain over 24 hours. However, it failed to break through key resistance levels, remaining within a defined trading range. Traders are watching for a potential breakout, but most remain cautious about a sustained move.

What Are Analysts Watching Next?

Analysts are closely watching for further developments in the labor market. A report on Friday will provide insight into December's employment figures, with the unemployment rate expected to be a key indicator for the Fed's policy path. If the jobless rate rises or remains stable, it could support expectations for rate cuts in the near term.

Investors are also monitoring the political tension between the Trump administration and the Federal Reserve. Powell's investigation has raised concerns about the Fed's independence and the potential for political interference in monetary policy. This dynamic could affect market confidence and the Fed's ability to anchor inflation expectations.

In the broader financial markets, Treasury yields reacted to the Powell investigation by diverging. Short-term yields fell, while long-term yields rose, signaling growing concerns about inflation and political uncertainty. This steepening of the yield curve reflects a shift in market sentiment toward higher risk premiums.

Overall, the market is balancing optimism about the Fed's inflation outlook with concerns about political pressure and the pace of rate normalization. While the CPI data provided some clarity, the coming weeks will be crucial in determining the Fed's next steps and its ability to maintain policy independence.