Market indicators show a near-zero probability (4.4%) of a Fed rate cut in January 2026, with the first reduction not anticipated until June. This cautious stance comes amid a complex economic battlefield. While slowing rent and a weakening labor market pull inflation down, massive proposed defense spending, a surprise Obamacare extension, and spiraling healthcare costs push aggressively in the opposite direction. Further muddying the waters, Trump-era tariffs continue to distort prices and jobs, with a key Supreme Court decision pending. The collision of these strong inflationary and disinflationary forces creates a significant risk of stagflation, making the Federal Reserve's patient hold on rates a prudent, if uneasy, compromise.
Major Points:
Very Low Odds of a January Cut: The market sees only a 4.4% chance of a Federal Reserve interest rate cut this month.
First Cut Not Expected Until June: The first full quarter-point reduction is fully priced in for the June 17 FOMC meeting, with a second likely by October/December.
Inflation Outlook Remains Murky: While recent CPI reports showed cooling, a rebound is possible. The Fed’s preferred measure (PCE) faces significant upward pressure from soaring healthcare costs, which could offset declines in rent.
Major Political-Economic Crosscurrents:
Fiscal Policy is Inflationary: A potential $500 billion defense spending increase and renewed Obamacare funding (curbing a projected 114% premium hike) threaten to boost debt and prices.
Tariffs Add Confusion: Existing tariffs have a stagflationary impact, hurting jobs while raising costs. A looming Supreme Court ruling could strike them down, adding to economic uncertainty.
Labor Market Weakness: Job growth is decelerating, a disinflationary force, but is partly caused by the damaging effects of tariffs.
Stagflation Risk: The author warns that combined inflationary forces (government spending, healthcare) could battle disinflationary ones (weak labor, rent), potentially leading to mild stagflation.
Fed's Stance Justified: Given these opposing powerful forces, the author concludes the Fed’s "wait-and-see" approach is reasonable, even if unelected political manipulation of rates would be worse.
