New inflation data expected to prompt the Fed to maintain current rates this month

December Inflation Data Signals Federal Reserve Likely to Hold Rates Steady

New inflation figures for December indicate that prices are still rising at a steady pace, suggesting the Federal Reserve is unlikely to change interest rates at its upcoming meeting.

The core Consumer Price Index (CPI), which excludes the more unpredictable costs of food and energy, registered a 2.6% increase for December. This was slightly below the anticipated 2.7%, but matches the rate observed from September through November, keeping it close to the Fed’s 2% goal.

Ellen Zentner, chief economist at Morgan Stanley Wealth Management, commented, “We’ve seen this pattern before—while inflation isn’t accelerating, it’s still above the target. Today’s data doesn’t provide the Fed with enough reason to lower rates this month.”

It’s important to note that recent government shutdowns affected how the Bureau of Labor Statistics (BLS) collected data for October and November, which may have influenced December’s comparisons. In particular, shelter costs climbed 0.4% in December, making it the biggest contributor to last month’s inflation. The BLS had previously assumed no increase in rental inflation for October, which may have led to an artificially higher reading for December after a cooler November.

Customers shop at the Reading Terminal Market in Philadelphia on Dec. 10, 2025. · ASSOCIATED PRESS

Gregory Daco, chief economist at EY-Parthenon, noted that even if shelter costs are overstated, they are balancing out the impact of tariffs on prices. Inflation for core goods held steady at 1.4% in December, reflecting a slow and uneven effect from tariffs, compared to typical price declines in more stable periods.

Daco added, “There’s nothing in this report that would encourage the Fed to move away from its current pause or to consider a rate cut at the next FOMC meeting. We still anticipate a total of 50 basis points in rate reductions in 2026, but expect the Fed to wait until at least June before resuming cuts.”

John Williams, president of the New York Fed, expressed optimism about economic growth prospects for 2026. He expects inflation to reach its peak in the first half of the year before dropping to just under 2.5% by year’s end. Williams also mentioned that the effects of tariffs on prices should be mostly temporary and fully realized within this year.

Williams emphasized that, after three rate cuts late last year, the Fed’s policy rate is now closer to a neutral stance. He believes current rates are well-suited to support employment while also working to bring inflation down, indicating the central bank is comfortable maintaining rates in the 3.5%–3.75% range for now.

Additional Developments

An ongoing grand jury investigation by the Justice Department involving Fed Chair Jay Powell is expected to add more uncertainty to future rate decisions.

Daco also suggested that policymakers might adopt a more hawkish tone to reinforce the Fed’s independence. He noted this situation could increase the likelihood that Jerome Powell remains on the Board after his term as Chair ends in May 2026, since his term as Governor extends through January 2028.