The November CPI Report and the Fed's Policy Dilemma: Inflation Cooling, Rate Cut Expectations Rise

The November 2025 U.S. Consumer Price Index (CPI) report has ignited a critical debate among economists and investors: Is the Federal Reserve poised to engineer a soft landing for the economy, or will its policy missteps trigger a hard landing? The data, released after a government shutdown delayed October's collection, revealed a year-over-year CPI increase of 2.7% and a core CPI rise of 2.6%, both below economists' forecasts of 3.1%. This moderation in inflation, coupled with a 4.6% unemployment rate and signs of a softening labor market, has intensified expectations for a Fed rate-cutting cycle to begin in December. For investors, the challenge lies in navigating this evolving landscape through strategic asset allocation, balancing the risks of a potential recession with the opportunities of a soft landing.

Inflation Cooling: A Mixed Signal

The November CPI figures suggest a deceleration in inflationary pressures, with energy prices rising 4.2% and food prices up 2.6% over the past year. However, the delayed data collection during the government shutdown and the holiday discounting period has cast a shadow over the reliability of these numbers. As noted by Reuters, the BLS relied on nonsurvey data sources to estimate October's CPI, potentially understating the true inflation trajectory. Additionally, the lingering impact of import tariffs-businesses have passed on 40% of tariffs by September, with 70% expected by March 2026-introduces a tailwind for future price increases. This duality-current cooling versus future headwinds-complicates the Fed's policy calculus.

The Fed's Dilemma: Rate Cuts and the Soft Landing

The Federal Reserve now faces a delicate balancing act. A rate-cutting cycle, historically associated with soft landings, appears inevitable. Market participants are already pricing in a 25-basis-point cut at the December meeting, with the Fed funds rate projected to fall to 3.4% by year-end 2026. This trajectory mirrors the 1995 and 2024 soft landings, where gradual rate reductions supported economic resilience without triggering recessions. However, the Fed must avoid overreacting to the November data, which may not fully capture the inflationary risks posed by tariffs and global supply chain bottlenecks.

Strategic Asset Allocation for a Soft Landing

Investors navigating this environment must adopt a nuanced approach to asset allocation, leveraging historical precedents and current market dynamics.

1. Equities: Favoring Resilience and Growth

Historically, soft landings have been bullish for equities. The S&P 500 surged over 28% in 2024 following the last soft landing, driven by large-cap tech stocks and AI-related sectors. For 2025, the focus should shift to a broader market participation. Small-cap stocks, which are more sensitive to rate cuts and have higher debt burdens, are poised to outperform as borrowing costs decline. Additionally, global equities-particularly in developed markets-offer diversification benefits as central banks worldwide ease policy.

2. Bonds: Capitalizing on a Falling Rate Environment

The rate-cutting cycle creates a favorable backdrop for bonds, but strategic duration selection is key. Intermediate-duration bonds, which balance yield and interest rate risk, are preferable to long-term bonds in a falling rate environment. Corporate bonds, especially high-quality investment-grade and select high-yield issuers, also present income-generating opportunities given the tight credit spreads observed in 2025.

3. Alternatives: Diversification in Uncertain Times

Alternative strategies, such as market-neutral funds and tactical asset allocation, provide diversification across varying rate regimes. These approaches can hedge against volatility while capturing gains from the broadening equity market rally expected as the soft landing scenario unfolds.

4. Sector Rotation: AI and Second-Order Beneficiaries

While technology and communications have led the recent rally, investors should look to sectors poised to benefit from the second-order effects of AI adoption. Industrials, materials, and real estate investment trusts (REITs) are prime candidates, as they supply infrastructure and services to the AI-driven economy.

Historical Lessons: The 1995 and 2024 Soft Landings

The 1995 soft landing offers a compelling blueprint for 2025. Following that period, the S&P 500 delivered annual returns above 20% for five consecutive years. Similarly, the 2024 soft landing saw the index rise over 28%, supported by Fed easing and a resilient labor market. These examples underscore the importance of maintaining a balanced portfolio with exposure to both value and growth equities, as well as a mix of long- and short-term bonds to hedge against shifting rate expectations.

Conclusion

The November CPI report signals a pivotal moment for the U.S. economy and financial markets. While the data suggests a cooling inflation trend, the Fed's response will determine whether this leads to a soft landing or a hard landing. For investors, the path forward lies in strategic asset allocation-leveraging the opportunities in equities, bonds, and alternatives while mitigating risks through diversification. As history shows, those who adapt to the Fed's pivot stand to benefit from the next phase of economic and market expansion.