CPI in the US declines, why are the internal voices within the Federal Reserve inconsistent?

In mid-November, US inflation data suddenly appeared, breaking market expectations and disrupting traders’ judgments on the Federal Reserve’s policy path for next year. This report, which statisticians have described as “full of noise,” what truth does it really hide?

Data Shock: Unexpectedly Downward, but with Hidden Mysteries

On December 18th East Asia time, data released by the US Bureau of Labor Statistics showed that the November unadjusted annual CPI was only 2.7%, well below the market expectation of 3.1%. Even more surprising, the core CPI unadjusted annual rate was only 2.6%, not only below the market expectation of 3%, but also the lowest level since March 2021.

Once this data was out, the market immediately responded: the US dollar index plummeted 22 points in the short term, and spot gold rose by $16. Looks like optimistic inflation data, but it conceals statistical biases.

Where is the problem? Due to the partial shutdown of US government agencies in October, the Bureau of Labor Statistics was forced to cancel the CPI report for that month, and when calculating November data, assumed zero change in October CPI. According to UBS analysis, this handling may have caused a downward statistical bias of about 27 basis points. In other words, the actual inflation level might be closer to the market’s initial expectation of around 3.0%.

However, from a structural perspective, inflation is indeed cooling. Core services inflation has become the main driver of the overall decline, with housing inflation dropping sharply from 3.6% to 3.0% annually, which is a genuine positive signal.

The Fed’s “Split” Moment

This flawed inflation data has given more voice to dovish members within the Fed. The December rate cut decision was approved by 9 votes to 3, marking the first time in six years that three dissenting votes appeared—this detail is often overlooked, but it signals a clear policy divide within the Fed.

The dissenting voices against rate cuts come from Kansas City Fed President Esther George and Chicago Fed President Goolsbee, who advocate maintaining rates unchanged. On the other hand, Fed Governor Mester supports a more aggressive rate cut. This split is not superficial but touches on fundamental differences in economic outlook.

According to the latest dot plot, the median expected federal funds rate for 2026 is 3.4%, and for 2027 is 3.1%, roughly consistent with September’s projections, implying potential rate cuts of 25 basis points each year over the next two years. But this is only the median, masking internal disagreements.

Atlanta Fed President Bostic even stated that his personal forecast for 2026 does not include any rate cuts at all—he believes GDP growth will stay around 2.5%, the economy is strong enough, and monetary policy should remain tight.

Short-term Pause vs. Long-term Path

While November CPI data is unlikely to change the Fed’s decision to pause rate cuts in January, it does reinforce the dovish voices within the Fed. If December data continues to show moderate growth, the Fed may reassess its rate cut plans for next year.

From the perspective of international financial institutions, market expectations are that the Fed may cut rates by 3 basis points in 2026, with an estimated total rate reduction of about 62 basis points next year. But Wall Street has a completely different forecast.

ICBC International expects that the Fed may cut rates by a total of 50-75 basis points in 2026, bringing rates back to around 3%, a “neutral” level. Meanwhile, JPMorgan is more cautious, believing that the US economy remains particularly resilient, with strong non-residential fixed investment, which will support growth. Therefore, limited room for rate cuts is expected, with policy rates stabilizing between 3% and 3.25% by mid-2026.

ING outlines two extreme scenarios: one where the economic fundamentals deteriorate sharply, prompting the Fed to adopt aggressive easing to counter recession risks, with 10-year Treasury yields potentially dropping rapidly to 3%; and a riskier scenario—where the Fed, under political pressure or misjudgment, eases too early or excessively, leading to no significant slowdown in the economy, severely damaging its credibility, and causing deep concerns about runaway inflation, possibly pushing 10-year Treasury yields to 5% or higher.

Uncertainty of Power Transition

Fed Chair Powell’s term will end in May 2026, and the appointment of a new chair could bring new variables to monetary policy direction. This not only concerns rate decisions but also how the Fed communicates with markets and conveys policy intentions to the public.

Meanwhile, in Q4 2025, the Fed will officially end nearly three years of quantitative tightening (QT), and from January 2026, it will launch a new mechanism called “Reserve Management Purchases” (RMP). Although the Fed officially describes it as a “technical” operation to maintain liquidity in the financial system, markets generally interpret it as “hidden easing” or “quasi-QE.” This transition could become another key variable influencing future rate paths.

The Labor Market: An Overlooked Key Indicator

While inflation data weakens, labor market data also warrants attention. In early November, initial jobless claims were 224,000, below the expected 225,000, reversing the previous week’s upward trend, indicating that the labor market remains stable in December.

According to China Merchants Bank International analysis, the US labor market has shown slight weakening but has not reached a clear deterioration level. Initial and continued claims remain low, and since October, there has even been some improvement. It is expected that in the first half of 2026, falling oil prices and slowing rental and wage growth will continue to support inflation decline, and the Fed may signal a rate cut once in June. But in the second half, inflation could rebound, and the Fed might hold rates steady at that time.

The Beginning of Market Reassessment

As the dollar index sharply fell to a short-term low of 98.20 following the data release, the euro-dollar rose nearly 30 points, and the dollar-yen declined nearly 40 points, traders are re-evaluating the entire interest rate outlook for 2026.

Although the November inflation report has statistical flaws, it provides at least one positive signal: the possibility that inflation is indeed cooling. As Brian Jacobsen, Chief Economist at Annor Wealth Management, said: “Some may dismiss this report’s ‘less reliable’ nature as a sign that inflation is cooling, but doing so is risky.”

Whether this is an abnormal statistical fluctuation or genuine inflation slowdown, the Fed’s next move will depend on economic data in the coming months. The seemingly moderate rate cut path shown in the dot plot now faces the dual challenge of economic reality and market expectations. Internal divisions within the Fed are already evident, with dovish and hawkish voices increasingly difficult to reconcile, making 2026 destined to be an unsettled year.