The Consumer Price Index for December, excluding food and energy, came in at 2.6%, slightly below expectations but unchanged from September through November. This reading remains near the Federal Reserve's 2% target.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, stated, "We've seen this movie before — inflation isn't reheating, but it remains above target. Today's inflation report doesn't give the Fed what it needs to cut interest rates later this month."
Data collection following last fall's government shutdown may have skewed the figures, with the Bureau of Labor Statistics making assumptions for October and November that affected comparisons. Shelter costs rose 0.4% in December, the largest factor boosting inflation last month, though the BLS assumed zero rental inflation for October.
Gregory Daco, chief economist at EY-Parthenon, noted in a written analysis that shelter costs are offsetting price increases from tariffs, even if overstated. Core goods inflation was unchanged at 1.4% in December.
Daco wrote, "There is nothing in this report that would prompt Fed policymakers to step off the pause bench and favor a rate cut at the upcoming FOMC meeting. While we continue to expect 50 basis points of policy easing in 2026, we believe the Fed will wait at least until June to resume cuts."
New York Fed President John Williams said Monday night he is optimistic about 2026 economic growth and expects inflation to peak in the first half of the year before falling to just under 2.5% by year-end. He stated tariffs will have largely "one-off" effects on prices fully realized this year.
Williams reiterated that the Fed is closer to a neutral level on its benchmark policy rate after three cuts late last year, implying rates can remain steady in the current 3.5%-3.75% range.
St. Louis Fed President Alberto Musalem echoed this view Tuesday morning, saying interest rates are close to neutral and he sees little need for further cuts now. "I see little reason for near term further easing of policy," Musalem said. "That would take policy into accommodative territory."
Musalem added that while he sees little evidence inflation will accelerate, it could prove more persistent. He stated the economy and consumer are strong, and the Fed must watch risk balances. "I think that it's unnecessary and unadvisable to bring monetary policy into an accommodative stance at this point in time," he said.
A Justice Department grand jury investigation into Fed Chair Jay Powell is likely to inject further uncertainty into rate setting. Daco added that policymakers may lean more hawkish to signal institutional independence, and the episode raises the probability Powell remains on the Board after his term as Chair ends in mid-May 2026.