US Personal Consumption Expenditures Prices rose by 2.9% quarter-on-quarter in the fourth quarter. This was above the forecast of 2.8%.
The Personal Consumption Expenditures price data from the fourth quarter of 2025, which came in hotter than we expected at 2.9%, confirms that inflation was more stubborn than forecasted heading into this year. This fact alone makes the Federal Reserve less likely to consider a rate cut in the near term. This backward-looking number is now part of a worrying pattern for the market.
Market Expectations Reprice
This concern is amplified by the more recent January 2026 CPI report released last week, which showed headline inflation ticking up to 3.2%, reversing the steady decline we saw in the back half of last year. As of this morning, fed funds futures are pricing in less than a 10% chance of a rate cut in March, a dramatic shift from the 75% probability we saw just six weeks ago. The market is quickly repricing its expectations for monetary policy for the entire year.
In response, we are seeing the 2-year Treasury yield climb back towards 4.6%, a level not seen since last November, putting direct pressure on equity valuations. This environment suggests we should position for increased market turbulence. We saw a similar dynamic in early 2024, when sticky inflation data led to a sharp, albeit brief, market downturn as rate cut hopes were delayed.
Derivative traders should consider purchasing put options on major indices like the S&P 500 and Nasdaq 100 to hedge against or profit from a potential downturn. With the CBOE Volatility Index (VIX) currently trading around 17, it is still relatively low compared to historical periods of policy uncertainty, suggesting options are not yet overly expensive. This presents a window to build defensive positions before volatility potentially increases further.
Another strategy is to use option spreads to express a more nuanced, bearish-to-neutral view with defined risk. For example, selling call spreads on technology-heavy ETFs can capitalize on decaying premiums if the market moves sideways or drifts lower under the weight of higher interest rates. This allows us to take a view without the full directional risk of shorting futures outright.
