U.S. inflation hits lows: What does it mean for the Fed in the coming years?

In the early hours of December 19, the global financial market received an unexpected shock. The November inflation data released by the U.S. Bureau of Labor Statistics showed a more pronounced slowdown than anticipated: the year-over-year Consumer Price Index (CPI) reached 2.7%, well below the forecast of 3.1%. The core inflation figure, even more surprising, stood at 2.6%, marking its lowest level in nearly three years. The reaction was immediate: the dollar plummeted 22 points intraday, while gold rose $16 spot in the same period.

The data that raises doubts: Real signal or statistical noise?

Although the numbers seem conclusive, analysts warn about their reliability. Due to the U.S. government shutdown in October, the labor agency was forced to omit that month from its calculation, assuming zero change in the CPI for that period. This statistical treatment introduced an estimated downward bias of 27 basis points, according to UBS analysis. Without this distortion, the actual inflation would be around the levels expected by the market, close to 3.0%.

However, behind the statistical noise, there is a genuine structural trend. Basic services inflation has moderated significantly, with housing costs falling from 3.6% to 3.0% year-over-year. This phenomenon reflects a real decompression in one of the most persistent components of inflation over the last 10 years, where the real estate sector has been a key driver.

Markets in motion: Expectations of easing

The reaction of financial assets immediately reflected new interpretations of monetary policy. Nasdaq 100 futures gained more than 1%, Treasury yields declined, and the euro strengthened against the dollar (rising nearly 30 points in the short term).

Market-implied probabilities for a rate cut by the Federal Reserve in January next year increased from 26.6% to 28.8%. Additionally, traders now price in approximately 62 additional basis points of monetary easing for the remainder of 2026, distributed across multiple cuts. This repricing reflects how the last 10 years of interest rate cycles have prepared the market for rapid shifts in policy direction.

Internal fractures within the Federal Reserve

The unexpectedly low inflation figure is already fueling divisions within the Fed. At the December meeting, the decision to cut 25 basis points was approved with 9 votes in favor and 3 against, the highest dissenting count in six years. Some officials, such as Kansas City President Schmid and Chicago President Goolsbee, opposed and advocated for pausing the cuts, while Governor Milan pushed for more aggressive reductions.

The Fed’s (dot plot) projects a policy interest rate of 3.4% for 2026 and 3.1% for 2027, implying modest cuts of 25 basis points annually. But these average figures hide deep disagreements: Bostic, President of the Atlanta Fed, stated that his forecast for 2026 does not include any cuts, expecting GDP growth of 2.5% that would justify maintaining a restrictive stance.

The gap between official projection and market expectations

BlackRock estimates that the most likely trajectory for the Fed points toward rates near 3% in 2026, a deeper reduction than the median 3.4% shown in the dot plot. This divergence reflects the tension between the cautious official guidance and the market’s aggressive bets.

From the fourth quarter of 2025, the Fed will also transition from quantitative tightening (QT) to a new mechanism called Reserve Management Purchases (RMP). Although formally defined as “technical” liquidity operations, the market interprets them as a hidden easing or quasi-QE, a regime change that could accelerate future rate cuts.

The labor factor and inflation in historical perspective

The U.S. labor market will continue to be the Fed’s compass. Initial unemployment claims in November reached 224,000, below expectations, reflecting labor market stability. However, compared to the last 10 years, the labor market shows signs of gradual weakening, though without catastrophic deterioration.

CMB International Securities projects that in the first half of 2026, inflation could continue to decline due to lower oil prices and decelerating wages, creating room for a possible cut in June. However, in the second half, inflation might rebound, forcing the Fed to keep rates unchanged.

Total divergence on Wall Street

Investment banks offer contradictory forecasts. ICBC International expects cumulative cuts of 50-75 basis points in 2026, bringing rates to the “neutral” level of around 3%. JPMorgan, on the other hand, maintains a more restrictive view: it believes corporate investment will continue to support growth, so it anticipates limited cuts that stabilize rates in the 3%-3.25% range by mid-year.

ING Group presents extreme scenarios: in one, severe economic deterioration prompts the Fed to aggressively ease, pushing bond yields down to 3%. In the other, premature easing generates distrust over inflation control, sending 10-year Treasury bonds even toward 5%.

Future uncertainties and investment opportunities

With Chairman Powell’s term ending in May 2026, the leadership transition at the Fed introduces additional uncertainty. Although November’s CPI probably will not alter the December decision to pause cuts in January, it will definitely amplify dovish voices within the organization. If December confirms the slowdown, the Fed could recalibrate its trajectory of cuts for 2026.

For investors, BlackRock suggests diversifying through short-term bonds (0-3 months), increasing exposure to medium durations, building bond ladders to secure yields, and seeking higher returns in high-yield segments and emerging markets.

Kevin Flanagan of WisdomTree summarized the situation: the Fed has become a “divided house” and the threshold for further easing is extraordinarily high. As long as inflation remains a percentage point above the target and the labor market does not cool significantly, consecutive rate cuts are unlikely.

The interest rate outlook for 2026 remains at a turning point. Although November’s data has statistical limitations, it has opened political space for new reductions. In the last 10 years, similar cycles have shown that monetary policy shifts can unexpectedly accelerate when weak data, political pressures, and market expectations converge. Next week’s economic data will determine whether this is a passing anomaly or the true beginning of a new easing cycle.