(Click on image to enlarge)

I produced the above chart in Excel by taking a weighted average of CME Fedwatch Interest Rate projections.

There is almost no chance of a cut in January.

Target Rate Probabilities for January 2026

(Click on image to enlarge)

As of January 11, 2026, there is only a 4.4 percent chance of a rate cut this month.

The first full quarter-point rate cut is not priced in until the June 17 FOMC meeting.

A second quarter-point cut is mostly priced in by the October 28 meeting, and fully priced in (but no more) by the December 9 meeting.

US Inflation to Pick Up After Muddy November CPI

Bloomberg reports US Inflation to Pick Up After Muddy November CPI

US consumers probably experienced only a modest pickup in inflation as 2025 drew to a close, consistent with price pressures that are gradually abating.

The core consumer price index, regarded as a measure of underlying inflation because it strips out volatile food and energy costs, is seen rising 2.7% in December from a year earlier. That’s just a touch more than the 2.6% annual advance in November, which was the smallest since early 2021.

On a monthly basis, economists expect 0.3% increases in both overall and core prices.

Economists said the November report, which showed a broad cooling of inflation, was distorted by the agency’s inability to collect most prices in October, as well as its assumption that key rent indexes were essentially unchanged for the month.

While that culminated in sizable downward pressure on the November figures, the December report, due on Tuesday, has the potential to reverse that bias.

Look Ahead, Not Back

The BLS assumed rent indexes were unchanged in October. OK. I suppose they could have dropped. We will find out shortly.

But looking ahead I expect some shocking numbers in the PCE for health care. And the PCE is the Fed’s preferred measure of inflation, not the CPI.

If I am correct, health care will more than wipe out and declines in rent this year (especially the PCE where health care has a bigger impact).

This explains the total capitulation by Trump and Republicans who suddenly agreed to Obamacare negotiations in January.

Senate Republicans Say 2-Year Obamacare Extension Deal Is Within Reach

Please note Senate Republicans Say 2-Year Obamacare Extension Deal Is Within Reach

This is like winning a game in regulation then voluntarily agreeing to overtime.

President Trump told House Republicans on Tuesday [January 6] that they should be “a little flexible” on abortion policy. 

Question of the Day

Q: Gee, who couldda possibly have predicted this?
A: Uh… Me.

And Here We Are

Republicans successfully ran out the ACA extension funding clock, seemingly winning the game.

In voluntary overtime, Republicans agreed to a two-year extension. Open enrollment which expired last month will be extended.

There are 24 million people on ACA, and a majority of them are in Republican states.

Obamacare costs were projected to go up 114 percent. Now they will only go up 26 percent.

Military Spending

This is not a done deal yet, but Trump Seeks a $500 Billion Increase in Defense Spending

That’s a 5.8 trillion increase in debt over 10 years factoring in interest.

If you think increasing the debt like this inflationary, you are correct.

Trump says he will pay for this from Tariffs. Well, that’s a lie, pretty much like everything else he says.

Tariffs

Tariffs rate to put upward pressure on inflation. Companies that held off hiking did so because they stockpiled inventory and because of wild swings in Trump announcements including major TACOs on tariffs.

Tariffs have destroyed jobs. It’s easy to see in rapid deceleration of job growth. It’s a stagflationary impact at first, then a disinflationary impact.

Also in play this month is a ruling by the Supreme Court of reciprocal tariffs.

On November 16, 2025 I discussed What Are the Odds the Supreme Court Rules Against Trump on Tariffs?

The Supreme Court decision is not random. I discuss a framework.

My take then was 75-25 against Trump. I expect a 6-3 ruling. Click for an analysis justice-by-justice.

If tariffs are stricken, that will add to deficits. But Trump vows to put them back on by other means.

I think that is easier said than done. But it sure will add to confusion.

Labor Markets

Labor markets are definitely disinflationary. But one of the reasons the labor markets are weak (tariffs) are not disinflationary.

The latest jobs report was much weaker than it appeared on the surface. And I expect still more weakness.

However, the labor market was good enough to put the Fed on hold in January. And since there is no February FOMC meeting, the next chance for a rate cut is March 18.

Synopsis

There are hugely inflationary and disinflationary forces in play. You can see that in polls and you can see that in stubbornly high bond market yields.

My fear is Trump will get what he wants on military spending by giving Democrats more entitlement spending.

If so, coupled with medical care, that could be enough to offset all of the disinflationary forces of rent and labor markets, producing a mild stagflation.

I am keeping an open mind here, but a wait-and-see policy by the Fed is reasonable (and I am no Fed apologist).

I do not think there should be a Fed in the first place but a Fed is better than political hacks (in either party) manipulating interest for political purposes.

Related Posts

January 1, 2026: Three More Trump Tariff TACOs on Furniture, Kitchen Cabinets, and Pasta

To fight inflation, that Trump denies exists, comes another round of TACOs.

January 3, 2026: What Was the Overall Impact of Trump’s Tariffs in 2025?

Tracking the Economic Impact of the Trump Trade War

January 6, 2026: If the Supreme Court Rejects Trump’s Tariffs, What Are His Options?

I count seven options Trump is likely to try. There are serious problems with all of them.

January 9, 2026: AI Is Killing Select White Collar Jobs. What’s Hot and What’s Not?

Private education and health accounted for over 100 percent of job gains in 2025.

Two Main Sources of Disinflation

The two main sources of disinflation are jobs and rent. For a discussion of jobs, please see the previous link on AI and this one on the base report: Nonfarm Payrolls Rise by 50,000 with 76,000 in Negative Revisions

2025 closed out with a thud. Here are the details.

The two main sources of inflation now are rising unfunded Congressional spending and medical expenses.

Obamacare is “only” 24 million people. More importantly, Medicare and corporate health care costs will wise about 10 percent. That impacts everyone else.

For discussion, please see Health Care Inflation Bomb Makes the Fed’s 2 Percent Target Almost Impossible

Let’s discuss 2026 health care premiums and what they mean to the Fed’s preferred measure of inflation.

I sort of regret that title because It’s possible jobs collapse so much the Fed has a chance. But that’s one hell of a way to hit an inflation target.

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