Assessing the Fed's Easing Path: November CPI and the Road to 2026 Rate Cuts

The Federal Reserve's policy trajectory in 2026 hinges critically on the interplay between inflation trends and labor market dynamics. The November 2025 Consumer Price Index (CPI) report, released on December 18, 2025, underscored a moderation in inflationary pressures, with headline CPI rising 2.7% year over year-below economists' forecasts of 3.1%-and core CPI increasing 2.6% annually. This marked a decline from the 3.0% annual inflation rate recorded in September 2025. While the government shutdown in October 2025 disrupted data collection, the two-month average monthly price increase of 0.1% suggested a cooling trend. Markets responded favorably, with S&P E-minis surging, Treasury yields falling, and the U.S. dollar weakening. These reactions signaled growing optimism about the Fed's potential to pivot toward rate cuts in early 2026.

Fed Policy Adjustments and the December 2025 Rate Cut

The Federal Open Market Committee (FOMC) acted decisively in December 2025, implementing a 25-basis-point rate cut to bring the target federal funds rate to 3.50%-3.75%. This decision, reached with a 9-3 split, reflected divergent views among policymakers: some advocated for a larger cut, while others favored maintaining rates unchanged. The FOMC acknowledged "moderate" economic growth and noted that inflation, though elevated, had "moved up from earlier in the year." This language highlighted the Fed's cautious optimism, balancing concerns about persistent inflation with signs of economic resilience.

The December rate cut was preceded by the September 2025 FOMC meeting, where participants projected one rate cut in 2026. However, the November CPI data and subsequent labor market softness-evidenced by a September unemployment rate of 4.4% and a declining private quits rate-prompted a recalibration. Goldman Sachs Research now anticipates two additional rate cuts in 2026, with the federal funds rate likely ending the year at 3.00%-3.25%. This projection incorporates expectations of slower labor market growth and a U.S. economy expanding at 2-2.5% in 2026, partly driven by reduced tariff impacts and tax cuts.

Market Reactions and Policy Implications

The Fed's December 2025 decision was met with mixed market reactions. While equity indices rallied on the prospect of easing monetary policy, bond yields retreated as investors priced in lower future inflation. The U.S. dollar's decline against major currencies further reflected expectations of accommodative policy. These responses underscored the market's alignment with the Fed's dual mandate: moderating inflation while supporting employment.

However, the Fed's forward guidance emphasized caution. In its post-November CPI statement, the FOMC reiterated its commitment to "carefully assess incoming data, the evolving outlook, and the balance of risks" before determining further rate adjustments. This language mirrored the September 2025 meeting's emphasis on data dependency, signaling that policymakers remain attuned to potential risks, such as inflation reaccelerating or labor market deterioration.

The Road to 2026: Key Considerations

The path to 2026 rate cuts rests on three pillars:
1. Inflation Moderation: The November CPI data, though distorted by the October shutdown, provided a clearer picture of disinflation. If core CPI continues to trend toward 2.0%, the Fed may feel emboldened to cut rates more aggressively.
2. Labor Market Softness: A rising unemployment rate and declining worker mobility suggest the labor market is nearing a "soft landing," reducing the urgency for aggressive rate hikes.
3. Global and Domestic Risks: The Fed's balance sheet adjustments, including purchases of shorter-term Treasuries, indicate a readiness to manage liquidity risks while maintaining price stability.

Goldman Sachs' projection of two 2026 rate cuts aligns with these dynamics, but investors should remain mindful of potential headwinds. For instance, if inflation resurges or economic growth accelerates beyond expectations, the Fed might delay further easing. Conversely, a sharper slowdown in employment or consumer spending could accelerate rate cuts.

Conclusion

The November 2025 CPI report and subsequent FOMC actions mark a pivotal moment in the Fed's policy easing. While the December rate cut signaled a shift toward accommodative policy, the central bank's cautious stance underscores the delicate balance between inflation control and economic growth. For investors, the road to 2026 rate cuts appears increasingly plausible, but the timing and magnitude will depend on incoming data. As the Fed navigates this complex landscape, markets are likely to remain sensitive to signals from both the CPI and labor market indicators.