Moderate Inflation Boosts Expectations of Cuts: What Do the Numbers Behind the Dot Plot Reveal?

A Market-Shaking Announcement

The night of December 18 marked a turning point in market dynamics. The US inflation data released by the Bureau of Labor Statistics revealed figures that surprised even the most seasoned analysts: the November annual CPI registered at 2.7%, well below the market forecast of 3.1%. Even more significant was the core CPI, which reached just 2.6%, not only below the expected 3%, but also the lowest level since March 2021.

The reaction was immediate. The dollar depreciated by 22 points within minutes, while gold jumped $16. US futures on the Nasdaq 100 rose more than 1%, and Treasury yields plummeted.

However, behind these captivating numbers lies a complexity that cannot be ignored. The report lacks October data due to the previous government shutdown, assuming zero change in the CPI for that month. According to UBS, this statistical treatment introduces a downward bias of approximately 27 basis points, meaning the actual figures could be closer to the market-expected 3.0%.

The Hidden Dynamic: Internal Tensions at the Fed

Although the Fed’s dot plot suggests an orderly trajectory of 25 basis point cuts annually for 2026 and 2027 (bringing the median rate to 3.4% and 3.1% respectively), the internal reality is significantly more conflicted.

In the most recent vote, the decision to cut 25 basis points in December was approved by only 9 votes in favor and 3 against, the highest number of dissenting votes in six years. While Schmid of Kansas City and Goolsbee of Chicago advocated for holding rates steady, Governor Milan supported even more aggressive reductions. Bostic of Atlanta, for his part, projected zero cuts for 2026, arguing that GDP growth will remain around 2.5%, justifying a restrictive policy stance.

The dot plot, therefore, does not capture these deep discrepancies. BlackRock suggests a more moderate trajectory, anticipating rates near 3% in 2026, diverging from the official midpoint of 3.4%. This gap between the formal guidance and market expectations reflects the uncertainty characterizing the coming year.

Inflation as a Labor Market Thermometer

Beyond the aggregate figures, the composition of the inflation slowdown is revealing. Housing inflation fell significantly from 3.6% to 3.0% annually, leading the moderation of the core CPI. This movement indicates that underlying pressures in basic services are genuinely decreasing, not just statistical anomalies.

Simultaneously, unemployment benefit claims stood at 224,000, slightly below the expected 225,000 and reversing the increase from the previous week. The labor market remains stable, but signs of weakening are beginning to emerge. CMB International Securities projects that in the first half of 2026, falling oil prices and slowing wage increases could allow for new cuts, while in the second half, inflation might rebound again.

Divergent Scenarios for 2026: The Dot Plot in Perspective

Wall Street remains divided on interest rate developments. ICBC International anticipates total cuts of 50-75 basis points in 2026, bringing the rate to “neutral” levels near 3%. JPMorgan, on the other hand, adopts a cautious view, relying on the resilience of US non-residential fixed investment and projecting stabilization between 3% and 3.25% by mid-year.

ING Group presents two extreme scenarios linked to the implicit dot plot. In the first, a substantial deterioration of economic fundamentals would force the Fed to loosen aggressively, potentially pushing the 10-year bond yield to around 3%. In the second, excessive monetary easing without clear slowdown would damage the institution’s credibility, triggering inflation concerns that could send yields soaring to 5% or higher.

The New Reserve Management Mechanism: Hidden Easing

A frequently overlooked aspect is the transformation of the Fed’s operational mechanism. In Q4 2025, the quantitative tightening that has been in place for nearly three years will end. Starting January 2026, the “Reserve Management Purchases” (RMP) will replace this regime.

Although the Fed officially classifies these purchases as technical operations to ensure liquidity, the market tends to interpret them as “implicit easing” or quasi-quantitative measures. This transition could become a critical variable capable of offsetting rate cuts and maintaining more accommodative monetary conditions than the superficial dot plot suggests.

Investment Outlook in an Uncertain Scenario

For investors, BlackRock recommends various fixed income strategies tailored to the current macro environment:

• Allocate liquidity to short-term Treasury bonds (0-3 months) or diversified short-duration funds
• Increase exposure to medium-duration bonds
• Build bond ladders to ensure stable returns
• Seek additional returns through high-yield bonds and emerging market debt

Kevin Flanagan of WisdomTree warns that the Fed has become a “divided institution” whose threshold for further accommodation is extraordinarily high. As long as inflation remains about one percentage point above the target, it will be exceedingly difficult to justify consecutive cuts unless the labor market cools significantly.

Looking Ahead: Political Uncertainty and Economic Data

The change in Fed leadership also introduces unpredictable variables. Chairman Powell’s term ends in May 2026, and a new president could recalibrate both the direction and communication of monetary policy.

Although this November’s report has evident statistical shortcomings, it has provided the market with a basis to reassess future interest rate trajectories. Guolian Minsheng Securities notes that even if these data do not trigger cuts in January, they will undoubtedly amplify dovish positions within the institution. If December continues to show inflation moderation, the Fed will face real pressure to reconsider its cut trajectory.

The dot plot projects an orderly path, but market participants are navigating more complex realities: internal political friction, covert operational transformations, and the growing gap between official guidance and participant expectations. In this context, the coming months of economic data will determine whether inflation moderation is sustainable or merely a statistical mirage.