Markets Weigh Waller Optimism, Await CPI on Rate-Cut Path

U.S. investors and policymakers await the release of the latest consumer price index (CPI) and unemployment data tonight at 21:30 ET. The numbers will shed light on inflation's trajectory and the health of the labor market, key factors in the Federal Reserve's upcoming policy decisions. The report comes at a pivotal time as the U.S. faces uncertainty over who will lead the central bank into 2026.

Federal Reserve Governor Christopher Waller, a top contender to succeed Chair Jerome Powell, has signaled optimism that inflation will ease within the next three to four months. Waller also supports the possibility of rate cuts of up to 100 basis points, suggesting that the current rate environment is still dampening economic growth according to Waller's comments. His comments add to the broader debate within the Fed about how aggressively to ease policy as the economy slows.

President Donald Trump has been vocal about his vision for the next Fed chair, emphasizing the need for someone who supports "lower interest rates by a lot." In a recent national address, Trump framed his economic agenda around aggressive rate cuts and promised a Fed chair who would prioritize reducing mortgage costs. The president's shortlisted candidates-Kevin Hassett, Kevin Warsh, and Christopher Waller-all support lowering rates, though none have fully aligned with Trump's calls for cuts to crisis-level rates.

Labor Market Uncertainty and Policy Divergence

The upcoming CPI and unemployment report will be scrutinized for signs of weakening in the labor market, which has already shown signs of softness. A recent joint employment report for October and November, delayed due to a government shutdown, showed rising unemployment to a business cycle high. If the trend continues, it could push the Fed toward more rate cuts in early 2026.

Waller has expressed concern about the labor market's short-term outlook, noting the impact of uncertainty around artificial intelligence and its effect on hiring decisions. He argues that underlying inflation pressures are easing, allowing the Fed to focus more on employment. Waller also downplayed concerns about inflation reaccelerating, saying that wage growth remains weak and inflation expectations are well-anchored.

Market Expectations and Political Implications

According to prediction markets, Waller has a 25% chance of being named the next Fed chair. However, Trump has reportedly leaned toward Kevin Hassett, his economic adviser, who has emphasized the Fed's independence from political influence. Hassett told CBS's Face the Nation that Trump's views on interest rates would carry no weight in Fed decision-making.

The political dynamics complicate the Fed's ability to maintain its traditional independence. While the central bank has historically operated with autonomy, Trump's push for an aggressive rate-cutting agenda has created tension. Investors and analysts are watching closely to see how the next Fed chair will balance the president's demands with the economic realities facing the U.S. economy.

A Market Awaits Clarity

The CPI and unemployment numbers are expected to offer a clearer picture of inflation and employment trends. However, the October data was incomplete due to the government shutdown, which delayed the collection of key metrics like the unemployment rate and CPI. The absence of October data creates uncertainty about the accuracy of the November report, potentially leading to volatility in financial markets.

As the U.S. economy heads into 2026, the Fed will need to navigate a delicate balance between supporting growth and maintaining inflation control. The upcoming data release will be a critical factor in shaping the central bank's next steps, and by extension, the broader economic outlook.