CPI Drops Below 2% as Fed Faces Rate-Cut Pressure Amid Cracking Labor Market

The U.S. Consumer Price Index (CPI) has fallen below 2%, signaling progress in the Fed's battle against inflation. This development has intensified calls for interest rate cuts as officials monitor a labor market showing signs of strain.

Federal Reserve Governor Stephen Miran recently indicated that 150 basis points of rate cuts are likely in 2026, based on his assessment that underlying inflation is near the central bank's 2% target. His remarks align with the lowest forecast among the 19 policymakers for the appropriate funds rate by year-end, suggesting a path of significant easing.

Miran's comments came as markets adjust to the possibility of more aggressive rate reductions. While the December Summary of Economic Projections called for only one quarter-point cut in 2026, political pressure from President Trump for more substantial cuts has heightened expectations of divergence from that baseline.

Why Did This Happen?

The Fed's rate-cut considerations are increasingly influenced by softening labor market conditions. A rise in unemployment and slowing wage growth have led to calls for monetary accommodation to prevent a deeper economic slowdown. Miran's forecast is driven by his view that inflation is stabilizing and that the central bank can afford to lower rates without reigniting price pressures according to his analysis.

At the same time, the Fed's leadership transition and Trump's vocal demands for cuts have created uncertainty. The incoming chair will need to balance these pressures with data-driven policy decisions. If inflation remains near 2%, the central bank may feel more comfortable implementing Miran's proposed 150 bps of easing.

How Did Markets React?

Wall Street has already adjusted to the prospect of more rate cuts. Morgan Stanley and Citigroup now expect at least 50 bps in reductions in 2026, with some forecasts suggesting up to 75 bps. These changes reflect the belief that the Fed will move more quickly in response to labor market deterioration and political pressures.

Traders are pricing in at least two 25 bps cuts for the year, shifting their expectations from earlier months. These changes have bolstered risk-on sentiment and benefited asset markets, including cryptocurrencies, which thrive in an environment of accommodative monetary policy.

What Are Analysts Watching Next?

Analysts are closely monitoring both inflation and labor market data to gauge the Fed's next move. While CPI has fallen below 2%, the Personal Consumption Expenditures (PCE) index—used by the Fed for policy—may provide a more accurate picture of inflation trends.

A key uncertainty remains the timing of rate cuts. If the labor market weakens further, the Fed may accelerate its easing path. Conversely, a stronger labor market or unexpected inflation pressures could delay reductions. The central bank's December projections suggest a cautious approach, but market expectations are shifting toward earlier and larger cuts.

Political dynamics will also play a role. Trump's housing agenda and broader economic plans, including a $200 billion injection into the housing sector, could influence the Fed's decisions. These moves may reduce the need for aggressive rate cuts by stimulating growth through fiscal policy according to economic analysis.

Investors should also watch for potential global spillovers. Barclays analysts have noted that geopolitical developments in regions like Venezuela could impact oil production and global growth, which in turn could influence the Fed's inflation and employment outlook as research shows.

As the Fed navigates a complex policy landscape, market participants are preparing for a year of heightened volatility. The central bank's ability to balance inflation control, labor market support, and political pressures will shape both domestic and global economic outcomes.