Traders Price Delayed Fed Cuts as Williams Cautions on Technical CPI Dip

Federal Reserve Governor John Williams said on Friday that the recent decline in U.S. inflation is largely due to technical factors and does not yet justify a shift in monetary policy. Speaking at a public event in New York, Williams emphasized the central bank's patience in assessing the data. His comments align with the Fed's recent decision to cut interest rates by 25 basis points at its December meeting, marking the third such cut of 2025.

The remarks come as market participants closely watch for signs that the Fed might ease policy further in the coming months.

Williams, a key voice on the FOMC, did not signal an immediate need to accelerate rate cuts despite soft inflation numbers. His stance reflects the broader Fed strategy of balancing inflation control with economic growth.

With the U.S. economy showing mixed signals, Williams reiterated that the central bank is committed to a data-dependent approach. The Fed's next meeting, scheduled for January 2026, will be a critical test of whether inflation trends support more aggressive easing or not.

A Technical Dip, Not a Trend

Williams attributed the latest CPI data to temporary factors, such as adjustments in energy prices and seasonal demand shifts. The headline CPI came in at 2.7% year-on-year in November, below expectations, while core CPI rose to 2.6%. These figures have fueled speculation that the Fed may cut rates again in early 2026. However, Williams warned against reading too much into the numbers.

He noted that the Fed's models suggest that these trends are not indicative of a sustained slowdown in inflation. Instead, they reflect the impact of one-off factors, such as the timing of government benefit distributions and changes in supply chain dynamics. "We are not in a hurry to act unless the data clearly point to a structural change," Williams said.

The central bank has been careful to avoid overreacting to short-term volatility. Recent balance sheet expansion plans, announced at the December meeting, also indicate a cautious approach to maintaining liquidity without further rate cuts.

Market Reactions and Investor Caution

Following Williams' comments, U.S. Treasury yields drifted lower as traders priced in a slightly delayed path of rate cuts. The 10-year yield dipped to 3.45%, while the 2-year yield hovered near 3.65%. The dollar also weakened against the euro and the yen, as investors weighed the Fed's signals.

Cryptocurrencies, which had seen a brief rebound on softer CPI data, showed mixed performance. Bitcoin edged above $88,000, but spot ETF outflows continued to weigh on sentiment. Ethereum and XRP also traded in a narrow range, reflecting cautious positioning ahead of the Fed's next move.

Equity markets remained range-bound, with the S&P 500 and Nasdaq Composite trading near 12-month highs. However, sector rotation suggested investors were shifting toward defensive stocks, indicating a preference for stability over aggressive growth plays.

What Analysts Are Watching

Analysts are now focused on whether the Fed will adjust its policy trajectory based on incoming economic data. The key metrics include next month's payroll report and the December CPI revision. If the data continues to show a moderation in inflation without a sharp slowdown in the labor market, the Fed may feel more comfortable cutting rates again in early 2026.

However, risks remain on the horizon. Inflation could rebound if energy prices stabilize or global supply chains face new disruptions. Additionally, any signs of persistent wage growth could undermine the Fed's progress in bringing inflation back to target.

Williams' emphasis on technical factors also highlights the central bank's evolving strategy. Unlike previous cycles, the Fed is now using a combination of rate cuts and balance sheet adjustments to manage liquidity and inflation. This dual approach has been less discussed but appears to be a key part of its long-term strategy.

Risks to the Outlook

The path forward is not without uncertainties. If inflation reaccelerates or growth weakens more sharply than expected, the Fed may be forced to recalibrate its approach. Market participants are also watching for any internal disagreements within the FOMC, particularly as the central bank approaches the end of its current tightening cycle.

Investors remain divided on the timing of the next rate cut. The CME FedWatch tool currently prices in a 26.6% probability of a 25-basis-point cut in January 2026. This suggests a significant degree of uncertainty, with market sentiment likely to shift quickly based on new data.

In the meantime, Williams' message is clear: the Fed will remain patient and let the data guide its next steps.