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

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

Money Moves

After 175 basis points in cuts, the Federal Reserve pauses as prices refuse to reach 2%

January 13th, 2026: December CPI Shows Inflation at 2.7%

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; markets expect no rate cut at the January 27-28 FOMC meeting, where the Fed will 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. 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.

The DOJ's criminal investigation of Powell, which he linked to his refusal to follow Trump's rate preferences, has sparked bipartisan backlash on Capitol Hill. Senator Thom Tillis has threatened 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.

Play on this story Voices Debate Who Said What? Predict

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

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People Involved

Jerome Powell
Jerome Powell
Chairmanship expires May 15, 2026; under DOJ criminal investigation; facing escalating political attacks
 Stephen I. Miran
Stephen I. Miran
Dissented in December 2025 favoring larger 50bp cut
 Scott Bessent
Scott Bessent
Leading search for Powell's replacement; expects announcement in January 2026
 Kevin Warsh
Kevin Warsh
Leading candidate per prediction markets (41% probability)
 Kevin Hassett
Kevin Hassett
Leading candidate alongside Warsh (39% probability)
 Thom Tillis
Thom Tillis
Threatening to block Fed nominees over DOJ investigation

Organizations Involved

Board of Governors of the Federal Reserve System
Board of Governors of the Federal Reserve System
Central bank
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)
U.S. Bureau of Labor Statistics (BLS)
Federal Statistical Agency
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

March 2022 January 2026

13 events Latest: January 13th, 2026 · 5 months ago Showing 8 of 13
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  1. December CPI Shows Inflation at 2.7%

    Latest Data

    Headline inflation unchanged from November; core CPI at 2.6%. Markets confirm expectations for Fed to hold in January.

  2. 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.

  3. 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.

  4. Powell Discloses DOJ Investigation

    Legal

    Fed Chair reveals grand jury subpoenas related to office renovation project, adding uncertainty to leadership transition.

  5. 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.

  6. 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.

  7. 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.

  8. Shutdown Ends After 43 Days

    Data

    Record-long shutdown concludes; BLS resumes data collection but October CPI data permanently lost.

  9. Government Shutdown Begins

    Data

    Federal appropriations lapse; BLS halts CPI data collection for October.

  10. Fed Begins Cutting Cycle

    Policy

    First rate cut in over four years, a larger-than-usual 50 basis points, as labor market concerns rise.

  11. Fed Reaches Peak Rate

    Policy

    Final rate hike brings federal funds rate to 5.25-5.50%, the highest level since 2001.

  12. 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%.

  13. 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%.

Historical Context

3 moments from history that rhyme with this story — and how they unfolded.

October 1979 - December 1982

Volcker Disinflation (1979-1982)

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.

Then

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.

Now

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 this matters now

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.

February 1994 - July 1995

Greenspan Soft Landing (1994-1995)

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.

Then

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

Now

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 this matters now

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.

December 2018 - July 2019

2018-2019 Fed Reversal

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.

Then

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

Now

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 this matters now

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.

Sources

(22)
+16
Bureau of Labor Statistics CNBC Bloomberg CBS News CNN Morningstar Goldman Sachs Federal Reserve Tax Foundation Fortune Kiplinger PBS News Politico Pro CNBC Bureau of Labor Statistics CNBC Fortune CNBC Bloomberg Fortune Morningstar CNN Business