CPI data released: The probability of a rate cut in April rises to 42%, and the market is betting that the Federal Reserve will act sooner.

U.S. December CPI data released as expected, with a year-over-year increase of 2.7% and a month-over-month increase of 0.3%, fully in line with market expectations. The seemingly modest data has sparked a re-evaluation among traders: the probability of a Fed rate cut in April has risen from 38% to 42%, reaching a new high. What is the market implying? Will the Federal Reserve really break from tradition and start cutting rates before Powell’s term ends in May?

CPI Meets Expectations but Still Falls Short

According to the latest reports, the U.S. December overall inflation rate remains at 2.7% YoY, and core CPI (excluding food and energy) has also risen to 2.7%. This result is completely in line with Wall Street’s mainstream expectations and offers no surprises to the market.

From the data, inflation remains “stubborn.” The Fed’s long-term target is 2%, and the current 2.7% level still has a 0.7 percentage point gap. This indicates that the pace of inflation decline remains slow, and the Fed is unlikely to significantly change its policy stance in the short term.

Why Has the Rate Cut Expectation Suddenly Increased?

Although CPI data met expectations, traders have increased their bets on an earlier rate cut by the Fed. What is the logic behind this?

Better-than-expected performance of the core consumer prices

A recent report clearly states that “core consumer prices increased slightly less than expected.” This detail is crucial. While overall and core CPI figures meet expectations, more detailed component data show inflation pressures easing. Traders are reassessing the timing of Fed rate cuts based on this finding.

Market considerations regarding Powell’s term

Powell’s term ends in May. According to relevant information, traders believe the Fed “may not wait until Powell’s May end to cut rates.” This suggests the market is weighing political and economic factors. If inflation data remains moderate, the Fed might initiate a rate cut cycle before Powell departs, rather than leaving it to his successor.

The Full Picture of Market Bets

Based on the latest data forecasts:

The consensus among traders is: maintaining rates in January is almost a certainty (95%), with the real debate being whether rate cuts will start in April or June. The increased probability of a rate cut in April indicates improved market expectations for inflation slowing.

Subtle Reactions in the Crypto Market

According to relevant reports, the crypto market’s reaction to this CPI data has been relatively rational. Greeks.live’s analysis shows that implied volatility (IV) in the crypto market has decreased significantly compared to a week ago, “indicating that crypto market participants generally believe macro data no longer impacts the crypto market.”

This reflects two phenomena:

• Weak market sentiment: bullish momentum is weak, and the market is sensitive to volatility, which is not conducive to a large rally
• Expectations are already priced in: traders have already digested the possibility that CPI will meet expectations, so the news landing does not bring many surprises

However, the weakening dollar continues to support Bitcoin prices. Currently, Bitcoin is trading at $90,561.

Key Points to Watch Next

Employment data is crucial

Relevant information indicates that strong U.S. employment data is the main reason JPMorgan has delayed expectations of a rate cut. If the labor market continues to perform well, it could weaken the Fed’s motivation to cut rates, thereby reducing the probability of a rate cut in April.

Wall Street’s optimistic outlook for 2026

According to recent analyses, Wall Street generally expects a “rate cut + AI + tax reform” triple resonance in 2026. In this context, the pace of Fed rate cuts will directly influence the performance of stocks, bonds, and the crypto market.

Uncertainty around Trump’s policies

Factors such as the tax incentives in the “Big and Beautiful Act” and tariffs could influence inflation trends and, consequently, the Fed’s decisions.

Summary

The CPI data met expectations but remains above the Fed’s target, resulting in a “lukewarm” outcome. However, the market has slightly increased the probability of a rate cut in April from 38% to 42%, reflecting cautious optimism among traders about further easing of inflation. Still, June remains the main expectation for a rate cut, indicating an overall cautious market attitude.

For the crypto market, the current macro environment is one of “waiting with caution.” Market sentiment is weak, and bullish momentum is lacking, but a weakening dollar provides some support. Upcoming employment data, Fed officials’ speeches, and Trump’s policy developments will be key variables influencing the trend. In the short term, the market is more likely to oscillate around $90,000 rather than break out significantly.