November CPI drops low: What opportunities are there for the Fed's dovish camp?

By the end of 2025, an unusual inflation report triggered a minor “reversal” in the financial markets. When the U.S. Bureau of Labor Statistics announced the November CPI data, the 2.7% year-over-year increase was significantly lower than the expected 3.1%, and core inflation also dropped to 2.6%—the lowest since March 2021. The immediate market reaction was clear: the US dollar fell by 22 points, gold surged by $16, and Nasdaq 100 futures rose over 1%. This strongly signals that the dovish faction within the Federal Reserve (Fed) has found an opportunity to reaffirm their stance.

CPI “containing noise” — Is the data truly reliable?

At first glance, the numbers look very positive. However, behind this month’s CPI release lies a notable “flaw.” Due to the U.S. government shutdown in October, the Bureau of Labor Statistics had to cancel that month’s CPI report. When calculating the November data, they assumed that October’s CPI fluctuation was zero—a potentially inaccurate assumption.

According to UBS analysis, this statistical handling could cause the final report to be biased downward by about 27 basis points. Removing this factor, the actual inflation data might be closer to the initial expectation of 3.0%. Nonetheless, analysts do not deny that, structurally, signs of cooling inflation are genuinely present. Housing inflation, a key driver of core inflation, has fallen sharply from 3.6% to 3.0%.

Market re-pricing Fed policy: Surface ripples

Despite the noise in this CPI report, markets chose to interpret it optimistically. In the interest rate futures market, the probability of the Fed cutting rates in early 2026 increased from 26.6% to 28.8%. Traders also adjusted expectations, forecasting that by the end of 2026, policy rates could be loosened by about 62 basis points—roughly three rate cuts over half a year.

This adjustment has ripple effects across currency markets. EUR/USD rose nearly 30 points, USD/JPY fell nearly 40 points, and non-dollar currencies generally appreciated. Brian Jacobsen, Chief Strategist at Annex Wealth Management, warned: “Some may see this cooling inflation report as ‘less reliable than usual’ and ignore it, but that comes with risks.”

Fed internal divisions: Hawk vs. dove battle

This low CPI figure has amplified a deep internal conflict within the Fed. At the December meeting, a 25 basis point rate cut was approved with 9 votes in favor and 3 against—the first time in six years that three dissenting votes appeared. Fed Kansas City Chair Schmid and Chicago Fed President Goolsbee opposed, advocating for holding rates steady to monitor economic data. Conversely, Fed Board member Milan supported more aggressive cuts.

The dovish camp has gained a strategic advantage. With CPI falling, policymakers favoring monetary easing (the doves) now have additional arguments to support their stance. Atlanta Fed President Bostic even stated that, in his forecast for 2026, he did not consider any rate cuts, based on expectations of GDP growth around 2.5%.

Interest rate trajectory: Dot plot vs. reality

The Fed’s dot plot shows a median forecast of 3.4% for 2026 and 3.1% for 2027—unchanged from September projections. However, these figures reflect a “general consensus,” not the “individual positions” of each member.

BlackRock’s analysis suggests a different path: the Fed will reduce rates from the current 3.50%-3.75% to around 3% by 2026, below the dot plot’s 3.4%. This discrepancy highlights the gap between market expectations (more optimistic) and the Fed’s official stance (more cautious).

A significant development often overlooked is that starting January 2026, the Fed will halt its “quantitative tightening” (QT) program, which has lasted nearly three years, and instead initiate the “Reserve Management Purchase” (RMP) mechanism. Although the Fed defines RMP as a technical activity to ensure liquidity, markets view it as a form of “hidden easing”—a monetary policy loosening under a veneer of neutrality.

Labor data: A crucial variable for Fed policy

Despite the sharp drop in CPI, not all economic indicators are “green.” At the same time as the CPI release, initial jobless claims stood at 224,000, slightly below the forecast of 225,000. The December labor market remained stable, with no clear signs of cooling.

CMB International Securities analysis indicates that the U.S. labor market is “softening slightly but not significantly deteriorating.” This is crucial: if inflation continues to decline while the labor market remains strong, the Fed will have a basis to cut rates without fearing an overheating economy. CMB forecasts that in the first half of 2026, inflation could further decrease due to falling oil prices, rent, and wages. The Fed might implement a single rate cut around June as a policy move. However, in the latter half of the year, inflation could rebound, prompting the Fed to hold rates steady.

Diverging forecasts: Wall Street “most uncertain”

Regarding the 2026 rate path, Wall Street’s outlooks are more divergent than ever. ICBC International predicts the Fed will cut rates by a total of 50-75 basis points, bringing the rate to around 3%, supporting a dovish view. JPMorgan adopts a “cautiously more optimistic” stance, citing resilient U.S. economic activity, especially strong non-residential fixed investment, which could sustain growth. They forecast rates remaining stable around 3%-3.25% through mid-2026—a more cautious outlook.

ING proposes two extreme scenarios. First, if economic fundamentals worsen, the Fed might loosen aggressively to counteract a recession, potentially pushing 10-year Treasury yields down to 3%. Second, if political pressures or misjudgments lead to premature easing before economic slowdown, it could damage the Fed’s credibility, spark fears of uncontrolled inflation, and cause 10-year yields to spike, possibly challenging the 5% level.

Investment strategies amid Fed’s “zigzag” path

Looking ahead, investors must prepare for a more complex policy environment. Chairman Powell’s term ends in May 2026, and a new appointment could alter the communication and direction of Fed policy.

Guolian Minsheng Securities suggests that, although the November CPI data is unlikely to prompt an immediate rate cut in January 2026, it will certainly strengthen the voices of the doves. If December data continues to show cooling, it could prompt the Fed to reconsider its rate reduction trajectory for 2026.

BlackRock recommends fixed-income strategies in the current macro environment: holding cash in 0-3 month Treasury bills or short-term bonds; increasing allocations to medium-term bonds; building bond ladders to lock in yields; and seeking higher yields through high-yield bonds and emerging markets.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, comments that the Fed’s internal divisions have become a “house divided,” with a high threshold for further easing. He emphasizes that, with inflation still about one percentage point above target, unless the labor market cools significantly, the Fed will find it difficult to decide on continuous rate cuts. In summary, the lower CPI has created a positive atmosphere for the doves, but this “opportunity” remains fragile. The Fed’s next moves will depend on upcoming economic data—inflation, labor market, GDP growth—all of which are interconnected. The rate reduction path on paper seems smooth, but in reality, economic conditions and market expectations continually push it in different directions.