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Monetary Policy2026-02-09
February CPI Fed Rate Outlook
Markets are on edge ahead of the January Consumer Price Index (CPI) release. With core CPI expected at 0.3% month-over-month, we analyze how the risk of an inflation resurgence driven by tariff effects could impact the Fed's rate policy.
Admin
The January Consumer Price Index (CPI) release, scheduled for mid-February, has emerged as the top concern for financial markets. The market consensus expects core CPI to rise 0.3% month-over-month, higher than December's 0.2% gain. Tariff policy pass-through effects and labor market rigidity are adding to inflationary pressures. The hawkish leanings of Kevin Warsh, the Fed Chair nominee, are also complicating market expectations for interest rates. We examine how bond and equity ETF strategies should be adjusted depending on the CPI outcome.
January CPI Outlook and Tariff Impact
The reason core CPI is expected at 0.3% for January is the gradual pass-through of tariff effects on prices. Additional tariffs on Chinese goods have begun to be reflected in consumer goods prices, and energy prices are also trending higher year-over-year. Year-over-year core CPI is expected around 3.2–3.3%, still well above the Fed's 2% target. The downward stickiness of housing costs and services inflation is slowing the pace of disinflation, which could limit the Fed's room for further rate cuts.
Fed Rate Policy Scenarios
Scenario 1 is if CPI comes in line with expectations (0.3%). The Fed is expected to hold rates steady and continue its data-dependent stance. TLT may see a modest decline, while AGG ETF is expected to be roughly flat. Scenario 2 is if CPI exceeds expectations at 0.4% or higher. Rate cut expectations would pull back, potentially causing TLT to drop sharply by 2–3%, with growth stocks also coming under pressure. Scenario 3 is if CPI comes in low at 0.2% or below, which would strengthen rate cut expectations, sending TLT sharply higher and producing a positive reaction in equity markets.
Bond ETF Positioning Strategy
Adjusting bond portfolios before the CPI release is advisable. Given elevated uncertainty, shifting weight toward IEF over TLT is the safer approach. IEF has posted a strong return of 23.2% this year, and its shorter duration limits sensitivity to interest rate swings. AGG ETF (yield 6.39%) is diversified across the entire bond market, making it a stabilizing holding regardless of the CPI outcome. Using a rebalancing calculator to simulate TLT vs. IEF allocations across different scenarios is recommended.
Equity Market Response and Asset Allocation
The most vulnerable sector in an inflation resurgence scenario is high-P/E growth stocks. QQQ (P/E ~32x) and TQQQ are highly sensitive to rising interest rates. In contrast, inflation-benefiting sectors such as XLE (energy) and XLP (consumer staples) serve a defensive role. Using an asset allocation calculator to pre-set stock, bond, and commodity weightings for each CPI scenario can help avoid emotional reactions after the release. The key is a two-step approach: complete rebalancing before the event, then make fine-tuned adjustments based on the outcome.
Conclusion
The February CPI release is a pivotal event that will shape the Fed's rate path for 2026. Depending on the direction of inflation, the choice between TLT and IEF, the balance between growth and value stocks, and bond duration strategy could shift significantly. Investors are best served by using rebalancing and asset allocation calculators to build scenario-specific response plans in advance, then reacting to the actual results with a clear head.
