Inflation at 3%: rising prices and political pressure test the Federal Reserve

Alarm bells rang again on Wall Street following the release of the latest U.S. wholesale inflation data.

In the latest episode of the podcast Mercado Sobre Ruedas, financial markets journalist Julián Yosovitch analyzes U.S. inflation, the pressure on the Federal Reserve (Fed), and the geopolitical impact on the global economy. Below, we review Yosovitch’s main reflections.

Alarm bells rang again on Wall Street following the release of the latest U.S. wholesale inflation data. January’s Producer Price Index (PPI) came in at 0.5% month-over-month, above the 0.3% expected by the market and the 0.4% recorded the previous month. On a year-over-year basis, the indicator rose to 2.9%, surpassing the projected 2.6%.

The greatest concern stemmed from core PPI, which excludes volatile prices. It increased 0.8% month-over-month and 3.6% year-over-year, well above the 3% forecast and the previous 3.3%. The data complicates the outlook for the U.S. Federal Reserve, which faces inflation still far from its 2% target and signs of cooling in the labor market, according to Yosovitch.

Pressure mounts on the Federal Reserve: inflation remains

Turning to the Fed, Yosovitch’s analysis explains that markets are pricing in a 96% probability that at its next meeting on March 18 the Fed will keep rates within the 3.50% to 3.75% range. The first rate cut is projected for late July with a 45% probability, a 25-basis-point reduction, followed by a second adjustment in October to close the year around 3.00% to 3.25%.

However, internal debate is intensifying, the markets expert explains, with Fed Chair Jerome Powell entering the final months of his term amid political pressure from Donald Trump’s circle to accelerate rate cuts. His potential successor, Kevin Warsh, has already been nominated but must be confirmed by the Senate.

Divergent views coexist within the committee. Austan Goolsbee, President of the Chicago Fed, argued that it would not be prudent to lower rates without clearer evidence of slowing inflation and warned that inflation stuck around 3% is inconsistent with the official target. On the other hand, Governor Christopher Waller expressed a more flexible stance, although he acknowledged that the labor market may be firmer than expected, reducing the urgency for further cuts.

The greatest risk for the monetary authority is facing a scenario of rising inflation alongside weakening employment—a combination that could force more severe monetary adjustments in the future.

In this context of heightened volatility, Swiss bank UBS downgraded its recommendation on U.S. equities and lowered its year-end target for the S&P 500 to 7,500 points, below the 7,650 previously estimated by other strategists. The firm cited risks related to dollar depreciation, stretched valuations, and political turbulence in Washington.

Historically, March tends to be a positive month for the S&P 500, Yosovitch explains, as it rises on average 1.1% and finishes higher 66% of the time since 1964, although it is characterized by slightly above-average monthly volatility.

Sector rotation and oil rally

The market is showing marked sector rotation, with mining and gold leading gains with advances of 35% so far this year, followed by energy, materials, and industrials (between 23% and 13%). In contrast, the financial sector is down 6%, technology 5%, and consumer stocks 2%, Yosovitch assesses.

Energy’s performance is partly explained by the rebound in oil prices, which are trading around $67–$68 per barrel, at their highest levels since mid-last year. The increase reflects geopolitical uncertainty and renewed negotiations between the United States and Iran over nuclear disarmament, set to resume in Geneva.

In sum, the combination of inflationary pressures, doubts about the labor market, political tensions, and questions surrounding the artificial intelligence boom creates a more challenging environment for Wall Street. The direction of monetary policy will be decisive in setting the tone for markets in the coming months.