Final Countdown
The Federal Reserve Open Market Committee (FOMC) maintained its target for overnight interest rates at a range of 3.50% - 3.75% for its first meeting of 2026. Today’s no-change decision follows from a series of rate cuts begun in early-fall that totaled 0.75%, leaving overnight rates now down 1.75% from their cycle peak. Political attacks on the Fed ratcheted up in recent weeks, making it more difficult for policymakers to chart an independent course. Fed Chair Jay Powell is in the final countdown of his tenure, with only two more FOMC meetings left, and the parlor game of betting on his successor is in full swing. Now, not only do we have to chart a course through confusing economic data, but we also must navigate the shifting composition of the Fed’s policymakers.
Data since the FOMC last met has been better than expected, if unusually noisy. Payroll growth continued in its meager 50K/month pace, but the unemployment rate dropped about two-tenths from recent highs. Response rates for the jobs surveys were unusually low. Consumer spending through the early part of the critical holiday season held up well, with “core” November retail sales rising +0.4% and overall consumer spending growing by a slightly smaller margin. From early indications, price pressure from tariffs has been manageable for consumer wallets, despite recent studies indicating that consumers were bearing 90%+ of the cost. There is some limited evidence that consumers are absorbing the higher prices of goods by reducing spending on services, which fits with the idea that tariffs are a disinflationary tax. Speaking of disinflation, measures of price pressures eased with the core CPI running at just a +1.6% 3-month annualized pace. But—and here’s where “noisy” comes into play—the BLS simply zeroed out some housing data during the government shutdown. Owing to the vagaries by which the BLS estimates rents, this zero month is going to compress the index through April. We think the underlying pace of inflation is indeed melting, but not nearly so fast as the recent prints would suggest. This balance between okay-not-great labor markets and melting inflation should permit more cuts as the year goes on, but the path from here to there is going to include a new Fed Chair.
