US stocks rally as inflation cools to 2.4%, boosting rate cut hopes
January CPI reading below expectations fuels optimism for earlier Federal Reserve easing, lifting markets across equities, bonds and commodities
US stocks surged and Treasury yields tumbled on Friday after a closely watched inflation report showed consumer prices rising at their slowest pace since May 2025, bolstering investor confidence that the Federal Reserve will deliver interest rate cuts sooner than previously anticipated.
The Consumer Price Index increased 2.4% year-over-year in January, below economists' expectations for a 2.5% gain, according to Labor Department data released on February 13. On a monthly basis, prices rose 0.2%, compared with forecasts for a 0.3% advance. The deceleration from December's 2.7% annual rate marked the lowest inflation reading since May 2025.
The softer-than-expected inflation figures triggered what traders described as a "quasi-everything rally," with gains spreading across equities, bonds, metals and commodities. The yield on the benchmark 10-year Treasury note fell 3.3 basis points to 4.071% following the release, reflecting growing expectations for monetary easing. Futures contracts tied to the S&P 500 and Nasdaq 100 both advanced sharply, while gold and industrial commodities also gained ground.
"The CPI print provides validation that the disinflationary trend remains intact despite concerns about services costs," according to market analysis from MarketPulse. The report "reinforced confidence for potential future interest rate cuts by the Federal Reserve."
The data significantly shifts the calculus for Fed policymakers, who had been signaling that rates would likely remain elevated until mid-2026. Before Friday's report, futures markets assigned only an 7.8% probability to a rate cut at the Fed's March meeting, with most investors expecting easing to begin in June. The cooler inflation reading has prompted traders to price in a higher likelihood of earlier cuts, potentially moving the timeline forward to March or April.
Core inflation, which excludes volatile food and energy components, also came in below some forecasts at 2.4% year-over-year, matching economists' projections. However, the details showed some lingering pressure from services costs, with shelter and medical service prices contributing to underlying inflation strength. This mix of moderating headline inflation with persistent services price increases will likely keep Fed officials focused on incoming data as they assess the timing and pace of rate cuts.
The market reaction underscores how sensitive investors remain to inflation data after more than two years of aggressive monetary tightening. Treasury markets have been particularly volatile in recent months as traders attempted to gauge when the Fed might pivot from its restrictive stance. Friday's yield decline suggests investors are increasingly positioning for a more accommodative policy environment.
Looking ahead, analysts will be watching subsequent inflation reports and Fed communications for confirmation that the disinflationary trend is sustainable. Any evidence of reacceleration could quickly reverse expectations for early rate cuts, while continued moderating price pressures would strengthen the case for sooner rather than later easing.