US consumer price inflation edged higher in December as temporary distortions linked to government shutdowns faded, reinforcing expectations that the Federal Reserve will maintain its current interest rate policy. The Consumer Price Index rose 0.3% in December, matching economist expectations, while annual inflation remained steady at 2.7%, unchanged from November.

December Inflation Data Overview

The Labor Department's Bureau of Labor Statistics revised its estimates for price increases between September and November to approximately 0.2%, suggesting a smoother underlying inflation trend than earlier data indicated. The December figures confirmed that inflation is neither accelerating sharply nor cooling fast enough to prompt immediate monetary policy changes.

Market Response and Federal Reserve Implications

Financial markets reacted cautiously to the inflation report, with US equity futures paring earlier losses as investors took comfort in signs of stabilizing rather than reaccelerating inflation. Treasury yields declined, with the benchmark 10-year yield easing to around 4.17%, reflecting modest relief that inflation did not surprise on the upside. The US dollar softened slightly, giving up part of its earlier gains as traders reassessed interest rate outlook.

The data strengthened market expectations that Federal Reserve policymakers will opt for a pause rather than a rate cut this month. While price pressures have moderated from their peak, they remain above the Federal Reserve's long-term target, limiting the central bank's flexibility in the near term.

Underlying Price Pressures and Market Analysis

Market participants broadly interpreted the data as supportive of the view that inflation follows a gradual downward path, though not yet at levels justifying immediate policy easing. The December numbers helped calm fears that inflation would rebound sharply once earlier distortions unwound, instead suggesting continuation of the slow disinflationary trend.

Underlying pressures remain visible in several areas:

• Housing costs: Shelter-related expenses remain elevated with little improvement in affordability
• Trade-related effects: Limited tariff pass-through continues contributing to price stickiness
• Global factors: Rising government bond yields in major overseas markets, including Japan, add upward pressure on US long-term rates

Economic Outlook and Policy Expectations

Bond investors viewed the CPI data as mildly supportive, particularly at the short end of the yield curve, which shows greater sensitivity to Federal Reserve policy expectations. However, global dynamics remain an important variable influencing longer-term yields and investment decisions.

Economists remain divided on timing for potential rate cuts in 2026. While December's inflation report provided little justification for immediate moves, it reinforced expectations that easing could begin later in the year if downward price trends continue. Many analysts believe policymakers will seek further confirmation from upcoming data, particularly January inflation readings, before signaling any policy stance shifts.

The December CPI report provided reassurance that inflation is not reaccelerating while underscoring the Federal Reserve's cautious approach. The balance between moderating inflation and persistent price pressures leaves the central bank firmly in wait-and-watch mode, with markets increasingly focused on when rather than whether rate cuts will eventually arrive.

President Donald Trump announced that he has no immediate plans to remove Federal Reserve Chair Jerome Powell, despite an ongoing Justice Department criminal investigation into cost overruns at the central bank's headquarters renovation project. Speaking to Reuters, Trump indicated that while Powell remains in his position for now, the situation continues to evolve with no final decision made.

Trump Weighs Potential Successors

While Powell stays in his role, Trump is actively considering potential successors as the Fed Chair's term approaches its May expiration. The administration is reportedly evaluating several candidates for the position.

Trump suggested the administration remains in a "wait-and-watch mode" regarding Powell's future, emphasizing it is too early to determine any eventual course of action. An announcement on the nomination is expected in the coming weeks.

Justice Department Investigation Details

The criminal probe centers on alleged cost overruns tied to a $2.50 billion renovation of two historic buildings at the Fed's headquarters. Powell has denied any wrongdoing and characterized the investigation as a pretext to pressure him over his refusal to cut interest rates as aggressively as Trump has demanded.

Republican Opposition and Bipartisan Criticism

The investigation has drawn significant criticism from Republican senators, international economic officials, investors, and former U.S. government officials from both parties. Many warn that the probe risks politicizing monetary policy and undermining Federal Reserve independence.

Senator Thom Tillis, a retiring North Carolina Republican and crucial swing vote on the Senate Banking Committee, has threatened to block all Fed nominations until the investigation is resolved. The opposition extends to GOP Senators Lisa Murkowski and Kevin Cramer, who have also criticized the investigation.

Fed Independence Under Scrutiny

Trump has brushed aside concerns about undermining central bank independence, including warnings that it could weaken the U.S. dollar or fuel inflation. He has defended a more direct presidential role in shaping monetary policy, arguing that his business background provides strong economic decision-making capabilities.

Powell's current term as Federal Reserve chair ends in May, though he is entitled to remain on the Fed's Board of Governors until 2028. The standoff represents another test of presidential authority limits, as Trump has also sought to remove other Federal Reserve officials, including Governor Lisa Cook, whose dismissal is subject to a Supreme Court hearing next week.