For the fifth consecutive year, U.S. inflation will finish above the Federal Reserve's 2% target. December's CPI report showed prices rising 2.7% year-over-year—unchanged from November and 0.7 percentage points above the Fed's goal. Core inflation came in at 2.6%, slightly below forecasts. The data confirms what markets already expected: no rate cut at the January 27-28 FOMC meeting, where the Fed will also release updated economic projections.
The Fed has cut rates six times since September 2024, bringing the federal funds rate from 5.5% to 3.5-3.75%. But the final stretch toward 2% inflation has proven stubborn, and tariff costs are now hitting consumers. Goldman Sachs estimates tariffs added 0.5 percentage points to 2025 inflation and will add another 0.3 points in the first half of 2026 as businesses pass through costs they initially absorbed. Meanwhile, the DOJ's criminal investigation of Powell—which he publicly linked to his refusal to follow Trump's rate preferences—has sparked bipartisan backlash on Capitol Hill, with Senator Thom Tillis threatening to block any Fed chair nominee until the probe ends. Treasury Secretary Scott Bessent said Trump will announce Powell's successor this month, but the political firestorm may complicate Senate confirmation.
