Stocks May Continue to Hold Up Despite Rising U.S. Inflation

Investors had a brief moment of concern over inflation on Wednesday, but the broader U.S. stock market appears to have taken it in stride.

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The Bureau of Labor Statistics reported that the consumer-price index (CPI) rose by 0.5% in January, marking the largest monthly increase since July 2023. This uptick in inflation suggests that the Federal Open Market Committee (FOMC) may opt to keep short-term interest rates steady, as it did following its January 29 meeting. In its previous three meetings, the Federal Reserve had reduced the federal-funds rate, bringing the target range down to 4.25%–4.50%, a full percentage point lower than before it began rate cuts in September.

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While the Fed has eased short-term rates, the bond market has moved in the opposite direction, pushing long-term rates higher. The yield on 10-year U.S. Treasury notes climbed to 4.54% early Friday, up from 3.66% on September 17—the day before the Fed initiated rate cuts.

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Investors typically expect rising long-term rates to pressure stocks, particularly when inflation is on the rise. However, the S&P 500 showed resilience, edging slightly higher for the week through Thursday. The index has gained 4.1% so far in 2025 and has risen 9.1% since September 17. All investment returns referenced include reinvested dividends.

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Christine Idzelis spoke with Russell Brownback, head of global macro positioning for fixed income at BlackRock, to discuss why the stock market’s rally could persist despite higher inflation. The bullish trend has carried into 2025 following strong performances in 2023, when the S&P 500 surged 25% and the index saw a 26.3% return.

Meanwhile, financial journalists Jeffry Bartash, Greg Robb, and Tomi Kilgore analyzed five key takeaways from January’s inflation data and what might come next.

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Beyond inflation concerns, the Federal Reserve faces additional regulatory hurdles. One major development is the suspension of operations at the Consumer Financial Protection Bureau (CFPB) under President Trump. The CFPB, established through the Dodd-Frank Act signed into law by President Obama in 2010, is funded by the Federal Reserve and plays a critical role in financial oversight.

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Joy Wiltermuth examined how this regulatory shift could give Republicans in Congress more leverage over Federal Reserve policy, given the resulting gap in the central bank’s financial oversight.

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Since its inception in 2010, the CFPB has worked to enhance transparency in lending, ensuring that borrowers fully understand the terms of loans, credit card fees, and mortgage costs. The agency has played a role in clarifying how interest accrues and how lenders allocate payments toward different loan balances.

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Aarthi Swaminathan explored the potential risks for borrowers and renters if the CFPB were to be completely dismantled. Mortgage lenders, in particular, have expressed concerns about operating without the CFPB’s standardized rules.

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In the latest edition of ETF Wrap, Christine Idzelis examined the increasing popularity of exchange-traded funds (ETFs) focused on municipal bonds. These bonds, issued by state and local governments, offer tax advantages, as their interest payments are generally exempt from federal income taxes. Additionally, investors residing in the states where the bonds are issued often benefit from exemptions at the state and local levels.

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Christine spoke with Craig Brandon, co-head of municipals at Morgan Stanley Investment Management, who highlighted the attractiveness of municipal bond yields, particularly for high-net-worth investors.

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For example, as of December 31, the Bloomberg High Yield Municipal Index had a yield-to-worst of 5.52%. For an investor in the 40.8% federal tax bracket, this translates to a taxable-equivalent yield of 9.32%, excluding state and local income tax considerations. The yield-to-worst accounts for bond prices, maturity dates, and call dates to help investors gauge worst-case return scenarios, assuming no defaults.

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That 9.32% taxable-equivalent yield is appealing, but how does it compare for individuals in lower tax brackets? The highest federal income tax rate for a married couple earning between $94,301 and $201,050 is 22%. For such investors, the 5.52% tax-exempt yield equates to a taxable-equivalent yield of 6.69%.

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Despite inflation concerns and rising long-term rates, the stock market continues its upward momentum. However, shifting Federal Reserve policies, regulatory changes, and evolving investment opportunities in municipal bonds remain key areas for investors to watch.

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