Inflation Data Clears the Runway for December Rate Cut
The final hurdle for a Federal Reserve pivot has been cleared. Following Wednesday’s release of Consumer Price Index (CPI) data, which showed inflation cooling to its slowest pace in four years, markets have effectively locked in a rate cut for this week. With the "Goldilocks" jobs report and a soft inflation print now in hand, the Fed is expected to lower its benchmark rate by 25 basis points on Wednesday.
Why this matters
Disinflation confirmed
The Bureau of Labor Statistics reported that headline CPI rose just 0.1% in November, bringing the year-over-year rate down to 2.6%. This drop was heavily influenced by the collapse in energy prices we highlighted on November 30. While Core CPI (excluding food and energy) remains stickier at 3.0%, the trajectory is undeniably downward. This gives the Fed the political and economic cover to unwind its restrictive policy stance without fearing a resurgence of 1970s-style inflation.
Avoiding "passive tightening"
The logic for a cut this week is mathematical, not just emotional. As inflation falls, the real interest rate (nominal rate minus inflation) effectively rises if the Fed does nothing. By cutting rates, Powell is not necessarily stimulating the economy; he is merely preventing policy from becoming accidentally more restrictive at a time when growth is already fragile.
The "Insurance Cut" narrative
Unlike previous cutting cycles driven by crisis, this move is framed as a calibration. The economy grew at a respectable pace in Q3, and unemployment is manageable at 4.4%. This allows the Fed to position this week’s move as a "mid-cycle adjustment" or insurance policy to sustain the expansion, rather than a rescue mission for a crashing economy.
What to watch
The Dot Plot (SEP)
The Summary of Economic Projections released Wednesday afternoon will tell the real story. While a cut now is priced in, the "dots" will reveal how many cuts officials expect in 2026. If the median dot shows only one or two cuts next year, markets expecting an aggressive easing cycle could be caught offside.
Retail tales tuesday
Before the Fed announces its decision, the Census Bureau releases November retail sales data on Tuesday morning. This will provide the final piece of the holiday shopping puzzle. A weak number here would validate the "frugal fatigue" thesis and potentially force Powell to sound more dovish in his press conference.
Powell’s "Hawkish Cut"
Watch the Chairman’s tone. He is likely to emphasize that the fight against inflation isn't fully won. A "hawkish cut" (lowering rates while warning that future cuts aren't guaranteed) could temper the equity rally and keep bond yields from plummeting too far, too fast.
