US November CPI: Inflation drops, Fed dove faction firmly in control of the opportunity

On the evening of December 18, 2024, Eastern Time, a report from the U.S. Bureau of Labor Statistics shook the financial markets. The November CPI data showed a year-over-year increase of only 2.7%, significantly lower than the market forecast of 3.1%. After weeks of recovery, the currency markets suddenly had to reassess expectations for Fed policy—clearly indicating that U.S. inflation is cooling down.

Where does this shocking number come from?

The November CPI data brought unexpected surprises. Not only did the overall CPI decrease, but core CPI—considered a true inflation indicator—rose only 2.6% year-over-year, below the expected 3.0%, and the lowest since March 2021. An important detail: this CPI report lacked October data because the U.S. government had a shutdown at that time. When calculating November inflation, the Bureau of Labor Statistics had to assume October’s CPI was unchanged (zero change).

According to UBS, this statistical approach could cause the final data to be underestimated by about 27 basis points. Removing this “noise,” the actual CPI figure might be closer to market expectations. However, looking deeper into the structural framework, the signs of inflation slowdown are real. Service inflation—especially housing inflation—has decreased significantly from 3.6% to 3.0%.

Market reactions: dollar dips, gold surges

Market reactions were swift. U.S. stock futures immediately rose, with Nasdaq 100 futures jumping over 1%. The U.S. dollar index fell 22 points in the short term, dropping to a low of 98.20. The dollar weakened as expectations grew that the Fed will cut interest rates sooner than previously thought.

Meanwhile, gold immediately increased by $16. U.S. Treasury yields also moved favorably, decreasing correspondingly. Futures markets began to reprice the rate outlook: the probability of a Fed rate cut in January rose from 26.6% to 28.8%, and new forecasts suggest the Fed could cut rates by an additional 62 basis points in 2026. Brian Jacobsen, Chief Strategist at Annex Wealth Management, warned: “While some may consider this CPI news as ‘less reliable than usual’ and ignore it, ignoring it is risky.”

Fed divided: internal debate over the rate cut path

The lower-than-expected CPI data provided strong arguments for the dovish faction within the Fed. In fact, in the recent meeting, the Fed approved a 25 basis point rate cut with a vote of 9-3—marking the first time in six years that there were three dissenting votes. Fed Kansas City President Schmid and Chicago Fed President Goolsbee opposed, advocating for holding rates steady, while one Fed member supported a more aggressive cut.

This division is also evident in the latest dot plot—Fed’s official forecasting tool. The dot plot shows Fed officials projecting a median interest rate of 3.4% in 2026 and 3.1% in 2027. However, individual views among officials vary widely. Atlanta Fed President Bostic even stated he does not foresee any rate cuts in 2026, believing the economy will grow strongly with a GDP around 2.5%, thus maintaining a restrictive policy stance.

Policy deeper than the dot plot suggests

Although the dot plot provides official forecasts, behind it lie complex calculations. The current rate of 3.50%-3.75% results from three consecutive rate cuts. BlackRock’s analysis suggests the most likely Fed path is to reduce rates to around 3% by 2026—differing from the 3.4% indicated by the dot plot, reflecting the gap between market expectations and official guidance.

Another key development is the Fed’s official pause of its QT (quantitative tightening) program in Q4 2025 after nearly three years of implementation. Starting January 2026, a new mechanism called the “Reserve Management Program” (RMP) will commence. The Fed describes this as a technical operation to ensure liquidity, but markets see it as a form of “hidden easing” or “partial quantitative easing.” This transition could become a decisive factor in the rate trajectory.

What to expect from the labor market?

With CPI cooling, the threshold for the Fed to continue rate cuts becomes a focal point. The Fed has indicated that this threshold has risen significantly. In the December statement, the Fed explicitly said that “the depth and timing” of future rate cuts will depend on economic outlook.

The labor market will be a key factor. Although November CPI fell unexpectedly, initial jobless claims released at the same time were 224,000, slightly below the forecast of 225,000, indicating the labor market remains stable in December. CMB International Securities notes that the U.S. job market has softened slightly but not significantly deteriorated.

CMB’s forecast suggests that in the first half of 2026, inflation may continue to decline due to falling oil prices, rental costs, and wages. The Fed might implement a single rate cut around June. However, in the second half, inflation could rebound, leading the Fed to hold rates steady.

Wall Street divided on the 2026 outlook

The November CPI data has triggered a range of forecasts, some even conflicting, from hedge funds. ICBC International predicts the Fed will cut rates by a total of 50-75 basis points in 2026, bringing the rate to a “neutral” level around 3%.

JPMorgan remains cautiously optimistic. They believe the resilience of the U.S. economy—especially strong non-residential fixed investment—will support growth. Therefore, the Fed will cut rates less, maintaining a policy rate around 3%-3.25% by mid-2026.

ING presents two extreme scenarios: one, a significant economic downturn prompting aggressive easing, with 10-year Treasury yields falling sharply to 3%; or two, political pressures or misjudgments leading to premature or excessive easing, which could damage the Fed’s credibility and spark deep concerns about uncontrolled inflation, potentially pushing yields above 5%.

Future outlook and investment strategies

Looking ahead, leadership changes at the Fed could introduce uncertainty. Chairman Powell’s term ends in May 2026, and the appointment of a successor could influence the policy direction and communication style.

Guolian Minsheng Securities believes that although the November CPI data is unlikely to alter the Fed’s decision to delay rate cuts in January, it will certainly strengthen the dovish voices. If December data continues to show a slight decline, it could prompt the Fed to reconsider its rate reduction path for the coming year.

For investors, BlackRock recommends fixed income strategies: holding cash in short-term Treasury bills or diversified short-term bonds; increasing allocations to medium-term bonds; building bond ladders to lock in yields; and seeking higher yields through high-yield bonds and emerging market debt. Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, emphasizes that the internal Fed debate has become a “house divided,” with a very high threshold for further easing. He warns that, given inflation remains about one percentage point above target, the Fed will find it difficult to cut rates continuously unless the labor market cools significantly.

As the dollar weakens sharply after the CPI release, gold surges rapidly. Traders are adjusting their expectations for the 2026 rate path. Although this inflation report has statistical flaws, it at least offers hope that inflation is truly cooling. The Fed’s next moves will depend on economic data in the coming months. While the dot plot suggests a flat rate path, the reality faces dual challenges from economic conditions and market expectations.