Progress in the Federal Reserve’s long-running battle against inflation did not improve or worsen in December, government data published Tuesday indicates.
Updates to the consumer price index (CPI) reveal the pace of growth in consumer prices across all categories rose 0.3% from November to December and 2.7% over the year, marking slightly faster monthly gains than the 0.2% growth from September to November but matching November’s annual increase. Prices rose 0.3% in both July and August.
Across all categories, prices for services moved higher while goods inflation softened.
Excluding volatile food and energy prices, core CPI rose 0.2% over the month and 2.6% over the year in December, matching November’s pace but slightly lower than economists’ forecasts of 2.7% annual growth, according to polling from financial data firm FactSet.
The U.S. Bureau of Labor Statistics, which publishes the index, said that a 0.4% monthly rise in shelter costs was the largest contribution in the all-items increase, with the indexes tracking food at home and food away from home prices each rising 0.7% from November.
In commentary shared with Scotsman Guide, Sam Williamson, senior economist at title insurance giant First American Financial Corp., called the report “slightly softer than markets expected,” adding that “it doesn’t fundamentally change the near-term outlook ahead of the Federal Reserve’s late-January meeting,” where a rate cut is not expected to happen.
Inflation meets Fed independence
Tuesday’s inflation print arrived in the wake of the Department of Justice’s issuance of grand jury subpoenas last Friday to the U.S. central bank and its chairman, Jerome Powell.
Powell revealed the subpoenas on Sunday in a rare video statement. The Fed chair claimed that the threat of criminal proceedings for cost overruns in an ongoing renovation of the Federal Reserve headquarters is being used as a pretext for President Donald Trump’s concerted efforts to influence the Fed’s interest-rate decisions, discredit Powell and thereby erode Fed independence.
Trump denied prior knowledge of the subpoenas in a Sunday night interview with NBC News. However, as recently as Dec. 30 the president accused Powell of “gross incompetence” during a press conference, saying the administration is “going to probably bring a lawsuit against him” while claiming the renovation project has the “highest price in the history of construction.”
Powell will preside over the Fed’s first monetary policy meeting of 2026, scheduled for Jan. 28 and 29, as the second current governor on the Fed’s seven-member board actively facing criminal probes following threats of termination by President Trump.
Fired but reinstated by the Supreme Court pending the outcome of ongoing litigation, Fed Governor Lisa Cook is also under investigation by the DOJ for unproven allegations of mortgage fraud that some legal analysts believe would not hold up in court. The high court is scheduled to hear oral arguments on Trump’s firing of Cook, on allegations alone, beginning Jan. 21.
Criminal referrals against Cook and other perceived political opponents were first sent to the DOJ from Federal Housing Finance Agency Director Bill Pulte, a staunch Trump ally who is now under separate investigation by a congressional watchdog for his handling of the referral process, including the appearance of political retribution in selective enforcement.
Monetary policy tensions
The U.S. central bank has a dual mandate to maximize employment and maintain stable prices. Throughout 2025, those goals were “in tension,” to use a frequent refrain of Powell’s.
With inflation remaining well above the Fed’s 2% target and the labor market showing signs of weakness, Fed policymakers held interest rates steady during their first five meetings of 2025, citing the uncertain impacts of the Trump administration’s trade and tariff policies.
The delay in cutting interest rates enraged Trump, who frequently lashed out at Powell on social media and in public appearances, calling him “Too Late” and a variety of other derogatory adjectives.
But beginning in September, Fed officials shifted their policy priority from combating inflation to bolstering labor markets after annual Labor Department revisions published in early September trimmed almost 1 million jobs from previously estimated totals for the 12 months ending last March.
Three successive quarter-point rate cuts lowered the overnight borrowing rate for banks to a target range of 3.5% to 3.75%.
Forward-looking projections published in conjunction with December’s rate-cut decision showed a median fed funds rate of 3.4% for 2026, which would mean only one quarter-point reduction this year.
That would be at odds with Trump’s wishes, who has called for rates lower than 2%.
Labor market weakness persists
The September shift to stimulate job creation, which economists have told Scotsman Guide is a less direct transmission of monetary policy than fighting inflation with rate hikes, has thus far yielded no material shift in job creation as the labor market continues cooling.
According to an analysis published last week by global tax audit and consulting firm KPMG, employment expanded by just 584,000 in 2025, its weakest annual pace since 2009, excluding pandemic-driven distortions in 2020. KPMG says 84% of job gains in 2025 came in the first four months of the year, preceding Trump’s launch of “Liberation Day” tariffs.
With Powell’s term as chairman due to expire in May, Trump has teased that his chosen successor will likely be announced this month. Loyalty to the president’s low-interest-rate agenda is non-negotiable for the next Fed chair, according to Trump, raising fears that U.S. central bank independence will not survive his second term.
Undermining longstanding neutrality of U.S. monetary policy — which translates to political meddling with the value of the U.S. dollar — poses severe risks to global financial markets that have banked on dollars as reserve currency since the end of World War II.
Government spending deficits that have already triggered an exodus from dollar-denominated assets by central banks and institutional investors around the world, keeping long-term interest rates elevated, is the “debasement trade” Fed independence insures.
“President Trump has indicated that one of his goals is to lower the amount of interest that the government has to pay to finance roughly $38 trillion in outstanding federal debt,” explained former Fed Chair Janet Yellen in a PBS Newshour interview that aired Monday night, addressing the criminal probe into Powell for cost overruns in the ongoing renovation of Fed headquarters.
“That is not one of the goals that Congress has assigned to the Federal Reserve,” said Yellen, who served as Fed chair from 2014 to 2018, during the second half of President Barack Obama’s second term and the first half of Trump’s first term, directly preceding Powell.
Yellen added that it is “a very dangerous thing to hear a president say he thinks [deficit reduction] is an appropriate goal for monetary policy,” because “once central banks lose their independence and are forced to help governments finance deficits, that’s when we see that’s always a precondition for high and even hyperinflation.”
Though Powell said during a December press conference that a rate hike was not part of any U.S. central banker’s base case for monetary policy in 2026, a spike in bond yields and long-term borrowing costs for consumers could arise from deficit-driven dollar debasement and adjustments higher in expectations for long-run inflation.
Monetary policy in mortgage
Following trillions of dollars in asset purchases to stimulate economic activity during the COVID-19 pandemic, the Fed pivoted from a stance of quantitative easing, which expands bank reserves to boost liquidity during periods of economic stress, to quantitative tightening, draining reserves by letting central bank assets mature without reinvestment.
In conjunction with the shift to quantitative tightening, pandemic-era inflation that peaked at 9.1% annual growth in June 2022 forced the Fed to throw buckets of water on overheating price gains in the form of interest rate hikes.
The subsequent spike in mortgage rates sent home sales to three-decade lows for three consecutive years in 2023, 2024 and 2025, locking mortgagees in ultra-low, pandemic-era rates while making homebuying unaffordable for typical earners and first-time buyers.
Part and parcel of the Fed’s campaign to right-size inflation has been allowing mortgage bonds to run off its books that it purchased during the pandemic to support the housing market.
But in an effort to subsidize borrowing costs and thereby increase mortgage demand, Trump confirmed last week that he has directed Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) regulated by the Federal Housing Finance Agency, to purchase $200 billion of mortgage-backed securities (MBS) that they issue to outside investors.
Average 30-year fixed-mortgage rates fell below 6% for the first time in three years on the news. But a conservatorship cap of $450 billion on their combined portfolio size will render MBS purchases in their current quantity short-lived, leading experts to caution that the move — though not unprecedented — could increase MBS volatility, widening spreads and mortgage rates over time when GSE purchases end.
Though the move has been met with mixed reactions from the mortgage industry, concern has been raised in broader financial markets that MBS purchases are another effort by Trump to skirt decision-making at the Federal Reserve, which is intentionally not buying MBS as a feature of its policy stance.
“This effectively creates a backdoor way for the executive branch of government to circumvent the Federal Reserve,” wrote Mark Zandi, chief economist at global ratings firm Moody’s Analytics, in a Monday post on LinkedIn. “It is currently allowing its holdings of MBS to prepay and mature. But the GSEs’ MBS purchases will work to countervail the Fed’s efforts. Who is in charge of setting monetary policy?”
