Tin CPI Decline and Internal Fed Debate: Will the Dovish Camp Find an Opportunity?

Latest US inflation data has caused a shock in the financial markets. The November CPI report released on the night of December 18th, Eastern Time, shows that the overall Consumer Price Index increased by only 2.7% year-over-year, significantly below market expectations of 3.1%. At the same time, core CPI (excluding energy and food) rose just 2.6% compared to the same period, the lowest since March 2021. The immediate market reaction: the US dollar weakened sharply, the USD index dropped 22 points, and gold surged $16. This data offers a glimmer of hope for those supporting monetary easing, also known as the “dovish” camp within the Fed.

Unusual CPI Data: Between Hope and Doubt

Beyond the seemingly impressive figures, the November CPI contains elements that require further analysis. Due to the US government shutdown in October, the Bureau of Labor Statistics had to cancel that month’s inflation report. When calculating November data, they assumed October’s CPI change was zero. This may seem like a simple technical adjustment, but UBS investment firm pointed out that this approach could underestimate inflation by about 27 basis points.

Removing this anomaly, the actual inflation data might be close to the market expectation of 3.0%, which wouldn’t be surprising. However, a detailed look at the CPI structure reveals signs of inflation cooling in certain sectors. Notably, core services inflation has become a key factor pulling down overall core inflation, with housing inflation dropping sharply from 3.6% to 3.0% year-over-year. This indicates that despite some statistical irregularities, the process of easing inflationary pressures is underway.

Market Reaction: From Dollar Weakening to Repricing Expectations

Immediately after the CPI release, financial markets experienced a series of dramatic moves. US stock futures rose across the board, with Nasdaq 100 futures up over 1%. US Treasury bond prices increased, yields fell—a clear sign that markets are beginning to price in the possibility of the Fed easing monetary policy.

Futures markets for interest rate expectations shifted notably. The probability of the Fed cutting rates in January 2025 increased from 26.6% to 28.8%. Additionally, markets now expect that by the end of 2026, the policy rate will be loosened by a total of 62 basis points. The US dollar quickly declined, with the USD index falling to 98.20. Non-dollar currencies generally appreciated, with EUR/USD up nearly 30 points, and USD/JPY down nearly 40 points. Brian Jacobsen, Chief Strategist at Annex Wealth Management, emphasized: “Some may see this inflation data as ‘unreliable’ and dismiss it, but that in itself carries significant risks.”

Internal Fed Debate: Doves in the Lead or Just Beginning?

Amid this impressive CPI data, internal debates within the Fed have become more intense. In fact, at the most recent meeting, the Fed approved a 25 basis point rate cut with a 9-3 vote. This was the first time in six years that there were three dissenting votes, reflecting unprecedented disagreement over the policy path.

Fed Kansas City Chair Chris Schmid and Chicago Fed President Austan Goolsbee opposed rate cuts, advocating for hold. Conversely, Fed member Milan supported a more aggressive cut. This divergence is clearly reflected in the latest Fed dot plot. The dot plot shows the median forecast for the federal funds rate in 2026 at 3.4%, and 3.1% in 2027—unchanged from September’s projections, implying roughly one rate cut of 25 basis points per year.

However, individual views of Fed officials tell a different story. Atlanta Fed President Raphael Bostic stated that his 2026 forecast does not include any rate cuts. He believes the economy will grow strongly at about 2.5% GDP, and that monetary policy should remain restrictive. This polarization indicates that while the dovish camp is gaining voice, significant resistance remains from those concerned about a resurgence of inflation.

Policy Roadmap Behind the Scenes: From Dot Plot to RMP

Although the dot plot provides a collective forecast, it masks more complex policy considerations. The current rate of 3.50%-3.75% results from three consecutive rate cuts. BlackRock’s analysis suggests the most likely policy path is for the Fed to reduce rates to around 3% by 2026—lower than the median 3.4% in the dot plot, highlighting a gap between market expectations and official guidance.

Another key factor is the Fed’s policy framework shift. In Q4 2025, the Fed will officially end its quantitative tightening (QT) program, which has lasted nearly three years. Starting January 2026, a new mechanism called “Reserve Management Purchases” (RMP) will commence. The Fed describes this as a “technical operation” to ensure liquidity, but markets interpret it as a form of “hidden easing.” This transition could become a significant variable in future rate trajectories.

Beyond the Numbers: Labor Market and Uncertainty

With the positive surprise from CPI, the next question is whether the dovish camp has enough arguments to push for further rate cuts. The answer is not straightforward. Despite the CPI decline, the labor market remains resilient. Initial jobless claims released the same day were 224,000, slightly below the forecast of 225,000, reversing last week’s upward trend.

CMB International Securities’ analysis indicates that the US labor market has only softened slightly but not deteriorated significantly. Continuing claims remain low. This creates a dilemma: inflation has eased (favoring the dovish side), but the labor market remains strong (limiting the Fed’s room to cut aggressively).

CMB International forecasts that in the first half of 2026, inflation could continue to decline due to falling oil prices, rent, and wages, possibly prompting a rate cut in June. However, in the second half, inflation might rebound, leading the Fed to pause rate cuts. This uncertainty suggests that even the policy easing advocates must proceed cautiously.

Long-Term Outlook: Market Expectations vs. Reality

On Wall Street, forecasts for the 2026 rate path show unprecedented divergence. ICBC International predicts the Fed will cut rates by a total of 50-75 basis points in 2024, bringing the rate to around “neutral” at about 3%. JPMorgan adopts a more cautious optimistic stance, believing the resilience of the US economy—especially non-residential fixed investment—will support growth. They project a more modest rate reduction, stabilizing around 3%-3.25% by mid-2026.

Meanwhile, ING presents two extreme scenarios: first, a severe economic downturn prompting the Fed to aggressively loosen policy, with 10-year Treasury yields dropping sharply to 3%; second, political pressure or misjudgment leading to premature easing while the economy remains slow, damaging Fed credibility and risking runaway inflation, with 10-year yields soaring toward 5%.

Strategic Recommendations: Flexible Approaches Amid Policy Volatility

Given this environment, investors should adjust their strategies. BlackRock recommends focusing on fixed income strategies: holding cash in short-term Treasuries (0-3 months), increasing allocations to medium-term bonds, laddering bond maturities to lock in yields, and seeking higher yields through high-yield bonds and emerging market debt.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, notes that the Fed’s internal divisions have become a “house divided,” with a high threshold for further easing. He emphasizes that, with inflation still about one percentage point above target, the Fed will find it difficult to cut rates continuously unless the labor market cools significantly.

Conclusion: CPI Data and Mixed Signals

The surprising November CPI report has opened a new perspective on future monetary policy. As the US dollar weakens sharply in the short term and gold surges, traders are reassessing rate trajectories. Although this inflation data may have statistical flaws, it at least offers hope to those in the easing camp.

The divergence between the official dot plot and individual Fed officials’ views indicates that easing will not be a straightforward path. The dovish faction has found an opportunity to push their agenda, but hawks still have enough influence to resist. The Fed’s next moves will depend heavily on upcoming economic data, especially labor market conditions and inflation pressures. The projected flat rate path in the dot plot may look simple, but the actual journey will likely be full of surprises.