The Fed's last mile: inflation stuck above target as rate cuts stall

Overview

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.

In This Story

6 People

Fed Holds Through Q1, Cuts Resume in June

3 Context

Volcker Disinflation (1979-1982)

Key Indicators

2.7%

Headline CPI (YoY)

December 2025 year-over-year inflation, unchanged from November

2.6%

Core CPI (YoY)

Excluding food and energy, slightly below the 2.7% forecast

3.5-3.75%

Federal Funds Rate

Down 175 basis points from peak of 5.25-5.50% in July 2023

100%

Probability of January Hold

Market-implied odds the Fed keeps rates unchanged on Jan 27-28

+0.3pp

2026 H1 Tariff Impact

Goldman Sachs estimate of tariff contribution to inflation in first half of 2026

Interactive

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Debate Arena

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People Involved

Jerome Powell

Chair, Federal Reserve (Chairmanship expires May 15, 2026; under DOJ criminal investigation; facing escalating political attacks)

Stephen I. Miran

Governor, Federal Reserve (Dissented in December 2025 favoring larger 50bp cut)

Scott Bessent

Treasury Secretary (Leading search for Powell's replacement; expects announcement in January 2026)

Kevin Warsh

Fed Chair Candidate (Leading candidate per prediction markets (41% probability))

Kevin Hassett

Fed Chair Candidate; Trump's Top Economic Advisor (Leading candidate alongside Warsh (39% probability))

Thom Tillis

U.S. Senator (R-NC), Banking Committee Member (Threatening to block Fed nominees over DOJ investigation)

Organizations Involved

Board of Governors of the Federal Reserve System

Central bank

Status: Holding rates steady; facing leadership transition

The U.S. central bank responsible for monetary policy, currently managing the transition from inflation-fighting rate hikes to a neutral stance.

U.S. Bureau of Labor Statistics (BLS)

Federal Statistical Agency

Status: Recovering from shutdown-related data gaps

The agency responsible for collecting and publishing CPI data, currently dealing with data quality issues from the October-November 2025 government shutdown.

Timeline

December CPI Shows Inflation at 2.7%
Data

Headline inflation unchanged from November; core CPI at 2.6%. Markets confirm expectations for Fed to hold in January.
January 13th, 2026 • 08:30 ET
Trump Attacks Powell: 'That Jerk Will Be Gone Soon'
Political

Trump escalated attacks on Powell in interview, calling him 'that jerk' and saying he'll be 'gone soon.' Denied knowledge of DOJ investigation despite Powell's public statement linking the probe to rate policy.
January 13th, 2026 • Morning
GOP Backlash Grows Against Powell Investigation
Political

Senator Thom Tillis (R-NC), Banking Committee member, threatens to block any Fed nominee until DOJ investigation ends. Bipartisan opposition emerges on Capitol Hill, potentially derailing Trump's succession plan.
January 12th, 2026
Powell Discloses DOJ Investigation
Legal

Fed Chair reveals grand jury subpoenas related to office renovation project, adding uncertainty to leadership transition.
January 11th, 2026
Bessent: Fed Chair Pick Coming This Month
Political

Treasury Secretary Scott Bessent said Trump will announce Powell's successor in January, likely around the Davos summit. Confirmed four candidates remain, with Kevin Warsh and Kevin Hassett leading.
January 8th, 2026
Goldman: Tariffs to Add 0.3pp to Inflation in H1 2026
Data

Goldman Sachs research shows businesses beginning to pass tariff costs to consumers after absorbing them in 2025. Estimates 0.3 percentage point inflation increase in first half of 2026 as stockpiled inventory depletes.
January 6th, 2026
Fed Cuts Amid Unusual Dissent
Policy

FOMC votes 9-3 for 25bp cut. Three dissents—the most since 2019—signal deep division on future path.
December 10th, 2025
Shutdown Ends After 43 Days
Data

Record-long shutdown concludes; BLS resumes data collection but October CPI data permanently lost.
November 12th, 2025
Government Shutdown Begins
Data

Federal appropriations lapse; BLS halts CPI data collection for October.
October 1st, 2025
Fed Begins Cutting Cycle
Policy

First rate cut in over four years, a larger-than-usual 50 basis points, as labor market concerns rise.
September 18th, 2024
Fed Reaches Peak Rate
Policy

Final rate hike brings federal funds rate to 5.25-5.50%, the highest level since 2001.
July 26th, 2023
Fed Delivers Largest Hike Since 1994
Policy

FOMC raises rates by 75 basis points, the largest single increase in 28 years, as inflation hits 9.1%.
June 15th, 2022
Fed Begins Rate-Hiking Cycle
Policy

First rate increase since 2018, raising the federal funds rate by 25 basis points as inflation surges above 8%.
March 16th, 2022

Scenarios

Fed Holds Through Q1, Cuts Resume in June

Discussed by: Goldman Sachs, Morningstar, CME FedWatch (consensus view)

The Fed keeps rates at 3.5-3.75% through the first half of 2026 as it monitors tariff pass-through and shelter inflation. With PCE expected to ease to 2.4% by year-end and a new chair in place after May, the FOMC delivers one or two 25bp cuts starting in June, ending the year at 3.0-3.25%. This path threads the needle between dovish and hawkish factions.

Tariff Spike Forces Fed to Pause All Year

Discussed by: JPMorgan, Tax Foundation, inflation hawks

Businesses pass through more tariff costs to consumers as 2025 inventories deplete, pushing headline inflation back above 3% by mid-year. The Fed holds rates steady through 2026, or even considers tightening if inflation expectations de-anchor. The 200% pharmaceutical tariffs floated by the administration add further upward pressure. The dot plot's single-cut projection proves optimistic.

New Fed Chair Accelerates Cuts

Discussed by: Stephen Miran, Mark Zandi (Moody's), administration officials

Trump appoints a Fed chair committed to rapid rate reduction. The new chair, taking office in May, pushes for aggressive cuts—potentially 100-150 basis points in 2026—arguing that inflation is close enough to target and that high rates are constraining growth unnecessarily. Markets rally on cheaper credit but long-term inflation expectations drift higher.

Soft Landing Achieved; Rates Settle at Neutral

Discussed by: Former Fed Vice Chair Alan Blinder, optimists citing 1995 parallel

Inflation gradually eases to 2.0-2.2% by late 2026 as shelter costs finally moderate and tariff effects prove transitory. The Fed delivers two 25bp cuts, landing at 3.0-3.25%—its estimated neutral rate. The economy avoids recession while inflation returns to target, echoing Greenspan's celebrated 1995 soft landing.

DOJ Probe Derails Fed Succession

Discussed by: Senator Thom Tillis, constitutional law analysts, Fed independence advocates

Republican opposition to the Powell investigation hardens, with Banking Committee members refusing to confirm any Fed chair nominee until the DOJ probe ends. Powell's term expires in May with no successor confirmed, forcing the FOMC to elect an interim chair from sitting governors—likely triggering a constitutional crisis over whether Trump can remove Powell from his board seat (which runs until 2028). Markets react to the uncertainty with volatility.

Tariff Pass-Through Spike Forces March Hike

Discussed by: JPMorgan inflation analysts, tariff policy researchers

Businesses that absorbed 80% of tariff costs in 2025 flip to passing through 80% in Q1 2026 as inventory buffers deplete. Headline inflation jumps to 3.5% by March. A hawkish Fed chair nominee, facing Senate confirmation, signals willingness to raise rates to prove inflation-fighting credibility. The FOMC delivers a surprise 25bp hike at the March meeting, reversing nine months of cuts.

Historical Context

Volcker Disinflation (1979-1982)

October 1979 - December 1982

What Happened

Inflation hit 14.8% in March 1980 after years of stop-go monetary policy. Paul Volcker, appointed Fed Chair in 1979, raised the federal funds rate to 20% by June 1981. The aggressive tightening triggered back-to-back recessions and pushed unemployment to 10.8%—but inflation fell below 3% by 1983.

Outcome

Short Term

Two recessions in three years; nearly 4 million job losses. Volcker faced fierce political pressure, with farmers driving tractors to the Fed's headquarters in protest.

Long Term

Volcker's credibility gambit worked: inflation stayed low for four decades. The episode established that central bank independence and commitment to price stability, even at painful short-term cost, could anchor expectations.

Why It's Relevant Today

Today's Fed faces much milder inflation (2.7% vs. 14.8%) and has already demonstrated its willingness to tighten aggressively. The question is whether it can finish the job without Volcker-style pain—and whether political pressure on a new chair might undermine that credibility.

Greenspan Soft Landing (1994-1995)

February 1994 - July 1995

What Happened

With unemployment falling and inflation at 2.8%, Alan Greenspan preemptively raised rates seven times, doubling the federal funds rate from 3% to 6% in 12 months. The rapid tightening shocked bond markets—Orange County, California went bankrupt. But the Fed then cut three times in 1995 when growth slowed.

Outcome

Short Term

Inflation held at 3%; no recession occurred. The 10-year Treasury yield spiked from 5.5% to 8% before settling back down.

Long Term

The economy entered a decade-long expansion. Greenspan called it 'one of the Fed's proudest accomplishments.' The episode proved the Fed could fine-tune rates to sustain growth without letting inflation escape.

Why It's Relevant Today

Powell's Fed is attempting a similar maneuver: having raised rates aggressively, it's now trying to calibrate cuts without reigniting inflation. The 1995 precedent suggests it's possible—but Greenspan didn't face tariff shocks or a leadership transition mid-cycle.

2018-2019 Fed Reversal

December 2018 - July 2019

What Happened

The Fed raised rates four times in 2018, reaching 2.25-2.50% by December. Markets tumbled, with the S&P 500 dropping 20%. Powell initially dismissed concerns, then pivoted sharply, cutting rates three times in 2019 as trade war uncertainty mounted and inflation stayed subdued.

Outcome

Short Term

Markets recovered; recession was avoided. The 'insurance cuts' became a template for responding to uncertainty.

Long Term

Critics later argued the 2019 cuts were unnecessary and contributed to asset price inflation. When pandemic stimulus arrived in 2020, the Fed had less room to maneuver.

Why It's Relevant Today

Like 2019, the Fed today faces pressure to cut amid trade policy uncertainty while inflation remains elevated. The episode shows how quickly hawkish turns can become dovish—and raises questions about whether 2025's cuts will prove premature if tariffs push prices higher.