Inflation's November Surprise: A Historical Lens on Fed Policy and Market Implications

The November CPI report delivered a clear, if delayed, signal. Headline inflation came in at a 2.7% annualized rate, well below the 3.1% expected by economists. Core CPI, which strips out volatile food and energy prices, was also cooler than anticipated, rising 2.6% over 12 months against a forecast of 3.0%. The numbers provided immediate relief, with S&P 500 futures jumping about 0.5% as investors parsed the data for clues on future Federal Reserve policy.

This is the first report after the 43-day government shutdown, which fundamentally complicates its interpretation. The Bureau of Labor Statistics canceled the October CPI release entirely, and the November report will not include 1-month percent changes for November because the October data is missing. The shutdown also disrupted data collection, with the BLS only beginning to gather November prices almost halfway through the month. This creates a significant data gap, making it impossible to assess the month-over-month trend that markets typically use to gauge momentum.

The central question is whether this marks a durable trend or a statistical anomaly. Economists are hesitant to read too much into the report as the start of a clear downward trajectory. The lack of a complete monthly picture and the potential for a bias in the latter-half-of-the-month data mean the reading is a snapshot, not a trend. As one strategist noted, it's not a "clean CPI number," and the overall theme remains one of uncertainty. The psychological distinction between a "two handle" and a "three handle" is paramount, but the data's integrity is compromised by the shutdown's aftermath.

For now, the market's positive reaction suggests the Fed's "put" is still in place. The report reinforces the idea that the central bank can focus on protecting the employment market, potentially easing monetary policy more than previously anticipated.

Yet, the bottom line is that this is a delayed signal from a broken data pipeline. It offers a hopeful data point but cannot yet confirm a durable shift in inflation's path.

Fed's Policy Dilemma: Pausing Cuts Amid Elevated Inflation

The Federal Reserve's recent decision to pause its easing cycle is a direct response to a stubborn inflationary headwind that has stalled disinflation progress. While the central bank cited downside risks to employment as justification for its latest 25 basis point cut, the broader data shows a more complex picture. The November Consumer Price Index, though delayed, is expected to show a 3.1% year-on-year increase, the largest gain in over a year. This reading sits well above the Fed's 2% target and directly challenges the narrative of a smooth glide path to price stability.

This tension is baked into the Fed's own projections. The median forecast for core PCE inflation to reach 2.1% by 2027 suggests a long, gradual decline. Yet, the November CPI data at 3.1% is not just a blip; it's a structural challenge. Fed Chair Jerome Powell has explicitly linked this persistent inflation to tariffs, a cost that is being systematically passed through to consumers. This is not a temporary supply shock but a policy-driven, structural increase in prices that complicates the disinflation story and raises the floor for where inflation can settle.

The bottom line is a constrained policy path. The Fed's median rate projection shows only one cut in 2026, with the terminal rate settling at 3.0%. This framework treats the current pause as the baseline scenario, not a temporary detour. The central bank is now navigating a classic dual-mandate dilemma: supporting a labor market that shows signs of softening while resisting the pull of a higher-for-longer inflation environment. The tariff-driven cost increase acts as a ceiling on how much the Fed can ease, as further cuts risk reigniting price pressures that are already proving sticky. For now, the pause is the policy.

Market Implications: Pricing a Pause vs. a Pivot

The market's initial reaction to the November inflation data was a textbook case of hope overriding caution. With the consumer price index rising at a 2.7% annualized rate, below the 3.1% economists expected, stock futures popped. S&P 500 futures were up about 0.5%, a move that snapped a losing streak and reflected a clear bet: the data supports a "Fed put" for stocks. The narrative was simple: cooling inflation gives the Fed room to ease policy, and markets are pricing in that relief.

That optimism, however, runs headlong into the Fed's own projections. The central bank's median rate path, released alongside the data, paints a far more restrained picture. It projects only one rate cut in 2026, with the terminal rate settling at 3.0%. This isn't a signal for a pivot; it's a framework for a prolonged pause. The market's positive reaction was a hope for a policy shift, while the Fed's data points to a new baseline of restrictive policy.

The primary risk to this narrative is a "tariff pass-through" that could push core inflation higher. Economists have noted that companies in goods-producing sectors are passing tariff costs through into prices, and the process is ongoing. If this gradual cost shift accelerates, it could force the Fed to maintain its current stance longer than markets anticipate. The November report, which was delayed and lacked October data, adds a layer of uncertainty that makes parsing a clear trend difficult. In this context, the market's rally is a bet on the Fed's commitment to protecting employment, but it's a bet that hinges on inflation staying cool without a major new shock.

The bottom line is a market interpreting a single data point through the lens of a hopeful narrative, while the Fed's own projections anchor expectations in a more cautious reality. The pause is now the baseline, and the path to a pivot remains narrow, dependent on a sustained and unambiguous cooling of underlying price pressures.

Historical Context: Comparing the 2025 Pause to Past Fed Decisions

The Federal Reserve's current "wait-and-see" approach mirrors a familiar pattern of policy caution. In late 2018, the Fed paused its rate-cutting cycle despite a still-strong labor market, only to reverse course decisively when growth data weakened. The current pause, with the target range at 3-1/2 to 3-3/4 percent, follows a similar logic: the Committee is attentive to risks and prepared to adjust if new data emerges. This is a classic case of policy inertia, where the central bank waits for clearer signals before committing to a new direction.

The inflation backdrop, however, recalls a more restrictive period. Elevated readings, with PCE inflation at 2.9% for 2025, echo the "sticky inflation" phase of 2022. Back then, the Fed maintained a restrictive stance until disinflation became undeniable. The key difference today is the starting point. The current policy rate is higher than the terminal rate implied by the Fed's own projections. The median path shows the federal funds rate falling to 3.0% over the longer run, meaning the Fed is beginning its easing cycle from a more restrictive position than it was in 2022.

This creates a critical constraint. The Fed's median rate path projects only one cut in 2026, with the terminal rate at 3.0%. This suggests the pause is not just about waiting for data but about managing the pace of easing from a higher base. It's a more cautious, incremental approach compared to the more aggressive cuts that followed the 2018 pause. The historical lesson is that such pauses can be durable, but they are also fragile. The Fed's commitment to returning inflation to its 2% objective remains firm, as does its assessment that downside risks to employment rose in recent months. The current pause, therefore, is less a sign of policy certainty and more a tactical holding pattern, testing the durability of the economic expansion against the persistent threat of inflation.