Labor market weakness, inflation uncertainty and political pressure will prompt the Federal Reserve to aggressively cut interest rates in early 2026, according to Mark Zandi, chief economist at Moody’s Analytics.

Although markets and Fed officials themselves expect only modest easing next year, Zandi expects the central bank to make three cuts of a quarter of a percentage point each before midyear.

“The still weak labor market, especially at the beginning of 2026, will be behind the decision to further loosen monetary policy,” the economist wrote in his recently published outlook for the coming year. “It will take longer for companies to be confident they won’t be caught off guard by changing trade and immigration policies and other threats before they start hiring again.”

“Until then, job growth will not be enough to prevent further increases in unemployment, and as long as unemployment rises, the Fed will cut interest rates,” he added.

Zandi’s forecast is at least a step above market and Fed expectations, both of which point to a slower pace of cuts.

Market prices are currently pointing to two cuts, with the first coming in April at the earliest and the second more likely in the second half of the year, probably around September, according to CME futures data expressed through the FedWatch indicator system.

Fed policymakers have an even more cautious outlook.

The grid of expectations from individual central bank officials only points to a full-year decline, according to an update provided in early December. Minutes from that meeting indicated the cut was a close call, with officials expressing the likelihood of further cuts, but only at a measured pace.

But Zandi believes the confluence of these factors will cause the Fed to respond more quickly. A wild card: the potential for President Donald Trump to reshape the central bank hierarchy.

As things stand, three of the seven Fed governors are Trump appointees: Christopher Waller, Michelle Bowman and Stephen Miran. With Miran’s term expiring in January, Trump is likely to appoint another loyalist to the post. From then on, Chairman Jerome Powell’s term at the helm ends in May, although his term as governor ends in early 2028. In addition, the president is trying to remove Governor Lisa Cook, although the courts have so far blocked him.

This increases the likelihood that the president, a staunch supporter of lower interest rates, will try to exert his will on the Federal Open Market Committee, which sets interest rates.

“Trump will also push for lower interest rates. The Federal Reserve’s independence will steadily erode as the President appoints more members to the Federal Open Market Committee, including the Fed Chair in May,” Zandi wrote. “With the congressional midterm elections approaching, political pressure on the Fed to further cut interest rates to support economic growth is likely to increase.”

The FOMC meets again on January 27th and 28th. According to CME, the probability of a cut at this meeting is only 13.8% based on market prices.

A job seeker speaks with a recruiter at the KeySource booth at the Mega JobNewsUSA South Florida Job Fair held at the Amerant Bank Arena on April 30, 2025 in Sunrise, Florida.

Joe Raedle | Getty Images

Nonfarm payrolls rose slightly more than expected in November but slumped in October, while unemployment hit its highest level in four years, the Bureau of Labor Statistics reported Tuesday in figures delayed by the government shutdown.

Job growth was a seasonally adjusted 64,000 this month, better than the Dow Jones estimate of 45,000 and up from a sharp decline in October.

The unemployment rate rose to 4.6%, higher than expected and the highest level since September 2021. A broader measure that includes discouraged workers and those holding part-time jobs for economic reasons rose to 8.7%, peaking in August 2021.

In addition to the November report, the BLS released an abbreviated October count that showed a 105,000 decline in payrolls. Although there was no official estimate, Wall Street economists largely expected a decline after a surprise rise of 108,000 in September.

The fall in October was due to a sharp decline in public sector employment as deferred layoffs introduced at the start of the year came into effect. The number of public sector employees fell by 162,000 over the month and fell by another 6,000 in November.

October’s decline was the third time in six months that payrolls were net negative. The BLS report also showed that August’s numbers were revised down by 22,000 to show a steeper loss of 26,000, while the original September figure was revised down by 11,000.

The BLS had warned that the household survey used to calculate the unemployment rate would be affected by the effects of the shutdown for several months. Difficulties in collecting the October numbers led to the cancellation of both the labor market report and the closely watched consumer price index.

Despite the complications, the report painted a familiar picture of the labor market.

The labor climate remains marked by low hiring and firing rates and is also affected by strict border practices under President Donald Trump that have diverted workers away from the usual flow of immigrants.

Company figures showed that most of November’s gains came from a familiar source: Health care added 46,000 jobs, accounting for more than 70% of the total net gain. Construction increased by 28,000, while social assistance contributed 18,000.

On the other hand, transportation and warehousing lost 18,000 jobs, part of an ongoing trend of job losses in the sector. The leisure and hospitality industry also recorded a loss of 12,000.

“The U.S. economy is in an employment recession,” said Heather Long, chief economist at Navy Federal Credit Union. “The country added just 100,000 new jobs in the last six months. The majority of those jobs were in health care, an industry that is almost always hiring because of America’s aging population.”

However, the White House assessed the report positively.

“The strong jobs report shows how President Trump is repairing the damage caused by Joe Biden and creating a strong America First economy in record time,” White House press secretary Karoline Leavitt said in a statement. “Workers’ wages are rising, prices are falling, trillions of dollars in investment are flowing into our country, and the American economy is poised for a boom in 2026.”

From a policy perspective, the Federal Reserve has had to walk a difficult line between trying to head off further weakness in the labor market and guarding against a worsening of stubbornly high inflation.

At its last meeting, the central bank cut its key interest rate by a quarter of a percentage point, but signaled that the bar for further rate cuts was higher. The Fed has approved three consecutive cuts since September, cutting its key interest rate to a target range of 3.5% to 3.75%.

“Given the data disruptions, the Fed is unlikely to give much weight to today’s report,” said Kay Haigh, global co-head of fixed income and liquid solutions at Goldman Sachs Asset Management. “The December employment data report, which will be released in early January before the next meeting, will likely be a much more meaningful indicator for the Fed in deciding its near-term policy stance.”

Markets continued to think the chances of another rate cut in January were slim. According to CME Group’s FedWatch, the likelihood was about 24.4% after the jobs report, unchanged from Monday.

Fed officials have maintained that the labor market is not a source of inflation, and Tuesday’s jobs report backed up that claim.

Average hourly wages rose just 0.1% for the month, below the 0.3% estimate, and were 3.5% higher than a year ago, the smallest annual increase since May 2021.

The 0.1 percentage point increase in the unemployment rate was largely due to the growth of the labor force.

Over the two-month period, the number of household employees actually increased by 407,000. However, this was partially offset by an increase in the labor force of 323,000 as the participation rate rose slightly to 62.5%.

In other economic news, the Commerce Department reported Tuesday that retail sales were flat in September while forecast for a 0.1% increase, based on seasonally adjusted figures but not inflation-adjusted figures. However, excluding cars, sales rose 0.4%, beating the 0.2% estimate.

Customers at the GasWay Xpress Mart at 1120 Erie Blvd. Pump Gas on Wednesday, December 3, 2025, in Schenectady, NY

Lori Van Buren | Albany Times Union | Hearst Newspapers | Getty Images

Holiday travelers are feeling some relief at the pump this year.

The average price of unleaded gasoline in the U.S. was below $3 a gallon for most of the month – the lowest level since 2021, according to AAA. The association said it will be the cheapest December for drivers to fill up their tanks since the pandemic year of 2020.

AAA data shows fuel prices fell about 7% from a month ago and fell about 43% from mid-2022 highs of about $5 a gallon, which followed runaway inflation in the wake of the pandemic.

The latest price drop comes as AAA predicts a record forecast of more than 122 million Americans will travel at least 50 miles from home in the 13 days between December 20 and January 1. AAA found that nearly nine out of 10 people who traveled during that period – or nearly 110 million – were likely to travel by car.

The drop in pump prices could help mitigate the impact of persistent inflation elsewhere during the holiday season.

According to CNBC’s All-America Economic Survey, just over 40% of respondents said they plan to spend less during the holidays this year, an increase of 6 percentage points from last year. Of those who pinch pennies, 46% blame the high cost of goods.

The national average hides wide regional differences, as both Hawaii and California recorded average gas prices above $4 on Monday. In Oklahoma, however, a gallon cost just under $2.30.

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Kevin Hassett, director of the National Economic Council, one of the finalists for the post of Federal Reserve chairman, showed his support for the independence of the central bank on Tuesday.

With President Donald Trump apparently in the final days of choosing a successor to Jerome Powell at the Fed, Hassett declined in a CNBC interview to directly address his own candidacy but said consensus-building was an important part of the job.

“The independence of the Federal Reserve is really, really important and the voices of the other people there [Federal Open Market Committee]“They are important too,” he said. “So interest rate movements need to be driven by consensus based on facts and data.”

Before last week, Hassett was considered the leading candidate to replace Powell, who is nearing the end of his second term as central bank chief. However, Trump said last week that former Gov. Kevin Warsh had also moved to the front of the pack following an interview between the two last Wednesday.

There has been some backlash against Hassett in recent days. Sources told CNBC that the president’s advisers fear Hassett will be perceived as too close to Trump and will do his bidding instead of trying to set interest rates in line with the Fed’s dual mandate of stable prices and full employment.

However, Hassett said his relationship with Trump should not be blamed on him.

“The idea that someone is not qualified for the job because they are a close friend who has worked well with the president is something that I think the president rejects,” he said.

Although he appointed Powell, Trump was a constant critic of the Fed chief.

Trump has called for aggressive rate cuts that have not been met, even though the Federal Open Market Committee (FOMC) has approved three consecutive rate cuts since September totaling three-quarters of a percentage point. Gov. Stephen Miran, a Trump appointee who came aboard in September, has voted against each of those cuts in favor of cuts of half a percentage point.

Hassett stressed the need for consensus building at the Fed. Trump has argued that the Fed should consult the president when making interest rate decisions.

“Rate movements must be driven by consensus based on facts and data,” he said. “When you do something wrong, you explain why and fix it. So that’s the way forward. But the president is an experienced observer of the economy, and if he has a good point of view, I’m sure others will see that too.”

Hassett and Warsh were among five finalists for the job. Treasury Secretary Scott Bessent, who has been leading the process, said on Fox Business Tuesday morning that the decision would likely come in early January.

People shop at a grocery store in Brooklyn on December 12, 2025 in New York City.

Spencer Platt | Getty Images

Wall Street awaits the release of the November consumer price index report on Thursday, as it will be the first reading for the period since the end of the record-breaking U.S. government shutdown last month.

The report, which tracks the average change in prices people pay for a range of goods and services, is expected to show a 12-month inflation rate of 3.1%, according to economists surveyed by Dow Jones. Excluding food and energy, core CPI is forecast to grow at an annual rate of 3.0%.

The Bureau of Labor Statistics said the release “will not include one-month percentage changes for November 2025, where October 2025 data is missing,” as the agency canceled the October inflation report in late November, weeks before the Federal Reserve’s final meeting this year. September CPI data – the most recent CPI report released and the only economic data released during the shutdown – showed an annual gain of 3.0% for the headline and core metrics.

“The psychological distinction between a two-trade and a three-handle will be paramount,” José Torres, senior economist at Interactive Brokers, said in an interview with CNBC.

While the consensus estimate suggests the annual rate will hit the 3% threshold this month, the senior economist sees the headline and core readings coming in lower than expected at 2.9% each, although he believes the range of possible outcomes for the headline rate could be between that and 3.1%.

If the report shows a value of 2.9%, this could provide some positive momentum for stocks into 2026. In fact, Torres believes such a number would pave the way for a so-called Santa Claus rally. He also believes it would impact the interest rate outlook for next year – a period in which the Fed forecasts a rate cut.

“It would really strengthen the expectations of monetary easing in the last inflation report – the CPI report – of 2025 if we could keep inflation at two instead of increasing it to three, because that will allow further rate cuts next year,” Torres added.

Not a “clean” report

While the release could help pave the way for a year-end rally, there would still need to be other catalysts in place, as others like Crossmark Global Investments’ Victoria Fernandez don’t believe a 0.1 percentage point move in one direction or the other would result in a “huge” market reaction. She also believes that even at 2.9%, Fed policymakers would still be on a wait-and-see approach.

“I think it’s going to be different. This isn’t going to be a clean CPI number,” the company’s chief market strategist said, citing the lack of monthly data as one factor and when exactly the BLS could start collecting November data as another.

US President Donald Trump signs the funding bill ending the US government shutdown at the White House in Washington, DC on November 12, 2025

Kevin Lamarque | Reuters

President Donald Trump officially signed a funding bill on November 12 that will reopen the government after a 43-day shutdown, the longest in U.S. history. This prompted the BLS to postpone the November CPI report from its originally scheduled release date of December 10th.

“When the government actually opened up and started collecting data, we were almost halfway through the month of November, so you only get the last half of the month,” Fernandez said. “You have to ask yourself, ‘Is there some kind of bias in terms of how pricing and how it works in the second half of the month compared to the beginning of the month?'”

Ultimately, the strategist believes the overall theme will be that inflation “remains high” and that it does not head back toward 2% as some expected.

“We have tremendous uncertainty about where we go from here because we have conflicting stories,” Fernandez said. “We can have weak unemployment trends, weak household income and weak consumer spending, and then next year we can expect 14% earnings growth and strong revenues. All the pieces of the puzzle don’t quite fit together.”

“We just need more information before we can make a real statement about what the long-term trajectory will be,” she continued.

As the shutdown ends, important data from another inflation measure has come to light, namely the September lagged value of the private consumption expenditure price index. However, investors are still waiting for the PCE reports for October and November, which have yet to be postponed.

Delayed producer price index figures for October will be announced with the November PPI report, the publication of which has been postponed until January 14th.

The Bank of England (BOE) in the City of London, UK, on ​​Monday December 15, 2025.

Bloomberg | Bloomberg | Getty Images

The Bank of England narrowly voted on Thursday to cut interest rates, its final monetary policy move in 2025.

The central bank’s nine-member Monetary Policy Committee (MPC) voted 5-4 on Thursday to cut the key interest rate by 25 basis points to 3.75%, marking the fourth cut of the year.

Economists had widely expected the rate cut, which comes at a time of weak economic data, a slowdown in the labor market and a recent decline in inflation that exceeded expectations.

Nonetheless, the vote was close, with BOE Governor Andrew Bailey siding with the committee’s more moderate members rather than the four policymakers who maintain that inflation, at 3.2% in November, is still far from the central bank’s 2% target.

In a statement, the MPC said that while inflation remained above target, “it is now expected to return to target more quickly in the near term.”

However, it was noted that “the extent of further monetary easing will depend on the evolution of the inflation outlook.”

Based on current findings, the MPC declared the “bank rate”. [the BOE’s benchmark interest rate] The gradual downward trend is likely to continue. But judgments about further policy easing will become more important.”

sterling remained unchanged against the dollar following the announcement, as did the FTSE 100. The yield on the benchmark 10-year U.K. government bond rose 3 basis points to 4.510%.

For now, the interest rate cuts are being welcomed by hard-pressed consumers as they make it cheaper to borrow, but many are losing out due to the reduced return on their savings.

Chancellor Rachel Reeves welcomed the central bank’s austerity policy, saying it would ease pressure on the cost of living.

“Today’s rate cut is the sixth since the election [in July 2024]the fastest pace of cuts in 17 years and good news for families with mortgages and businesses with credit,” she said in comments to X, adding that “there is more work to be done on the cost of living.”

Outlook for 2026

Economists expect the central bank could make the next rate cut in early 2026 if macroeconomic data continues to allow for more room or maneuver. The Bank of England (BoE) said on Thursday it expects the economy will not post growth in the fourth quarter of 2025.

However, there are caveats to the number of cuts we were able to see.

“We will see cuts, but perhaps not many more,” Jack Meaning, chief U.K. economist at Barclays, told CNBC on Thursday after the release.

“[After] With growth and inflation slowing, they have to acknowledge that more cuts are likely to come, but they are keeping all options open,” he told CNBC’s “Decision Time.”

“Further easing seems likely beyond the December meeting,” Allan Monks, chief U.K. economist at JPMorgan, said in an analysis on Wednesday. JP Morgan’s current base case calls for two further cuts in March and June, which would bring the key rate down to 3.25%.

“One downside, however, is the high wage expectations for 2026. That keeps the BOE cautious, but if the picture there were to weaken, that could take the BOE off its gradual easing path and open the window for another cut in February.” he said.

Bank of England Governor Andrew Bailey attends the central bank’s press conference on the Bank of England’s monetary policy report in London on May 9, 2024.

Yui Mok | Afp | Getty Images

Bruna Skarica, chief U.K. economist at Morgan Stanley, and Fabio Bassanin, U.K. strategist, said in a note that they expect another cut in February due to a decline in inflation pressures and a rise in the unemployment rate. However, they expected a “conservative message” on future rate cuts when the next rate cut comes.

“After that, based solely on the evolution of inflation and wage data, as well as what appears to be a stubborn unemployment rate in our forecasts, we still expect the BOE to be able to implement two more rate cuts in the first half of 2026, in April and June.”

A significantly lower-than-expected consumer price report for November was released on Thursday, breaking the recent trend of stubborn inflation.

Stocks skyrocketed. Yields fell. The chances of a Federal Reserve interest rate increased.

And many economists scratched their heads.

The Bureau of Labor Statistics reported that the consumer price index had an annual inflation rate of 2.7% last month, while the core CPI – a measure that excludes volatile food and energy prices – was even lower at 2.6%. Both were below economists’ estimates, as people surveyed by Dow Jones called for a headline annual rate of 3.1% and a core CPI rate of 3%.

Thursday’s release of November data was delayed eight days due to the U.S. government shutdown, but more importantly, October data was scrapped, leaving the BLS to make certain methodological assumptions about the previous month’s inflation levels.

These assumptions in the methodology were not clear to the economists and were not fully explained in the press release.

“The negative surprise reflects weakness in both goods and services, but may be due in part to methodological issues. The BLS may have advanced prices in some categories, which would have effectively assumed 0% inflation,” Michael Gapen, chief U.S. economist at Morgan Stanley, said in a note, calling the November readings “noisy” in a way that makes it “hard to draw firm conclusions.”

“If these technical factors are the main cause of the weakness, we could see another acceleration in December,” Gapen added.

The main topic: OER

Economists viewed a particularly important section of the data as problematic: owners’ rent. This is an important part of calculating inflation in the real estate market.

UBS economist Alan Detmeister said October price changes for OER appeared to have been “zeroed out”.

Evercore ISI’s Krishna Guha dug deeper, saying it appears that the BLS “assumed zero inflation in several categories” when calculating OER for about a third of the cities in use.

“To the extent that it introduces a downward bias, the Fed would be cognizant of the risk of taking housing services inflation data at face value,” he wrote in a note Thursday.

Detmeister said the effects could last for several months.

“This weakness should be reversed by very strong OER and tenant increases in the April CPI, which will be released in May, but until then OER and tenant rent price levels will trend downward,” he said.

Wolfe Research’s Stephanie Roth estimates that the 0.13% increase in rent and the 0.27% increase in OER in the two-month period represent increases of about 0.06% and 0.13%, respectively, from the previous month.

CNBC has reached out to BLS for comment.

There were other problems too.

Roth noted that there was likely downward pressure on certain categories of goods because the BLS data collection period occurred later in November, a time when there were “more holiday discounts.”

“The market appears to be interpreting the data as a dovish signal, but given the technical quirks, we expect the Fed to place less weight on this reading,” she said in a note to clients. “While positive inflation does not appear to be rising sharply due to tariffs, a rebound is likely to occur as data normalizes following the volatility associated with the shutdown.”

To be sure, there was some skepticism about the report ahead of its release, with some on Wall Street expressing concerns about bias due to the impact of the shutdown, which ended in mid-November.

The enthusiasm on Wall Street that followed the release faded as trading continued. Stocks were off their highs, with technology stocks doing most of the heavy lifting and stocks more tied to the economy like banks in the red. Yields were also below their lows.

— With reporting by Steve Liesman

People buy groceries at a store in Port Washington, New York, USA, November 19, 2025.

Shannon Stapleton | Reuters

Consumer prices rose less than expected in November, giving investors hope that inflation pressures could cool enough to ease U.S. monetary policy more than Wall Street expects.

The consumer price index rose 2.7% on an annual basis last month, according to a delayed report from the Bureau of Labor Statistics. Economists polled by Dow Jones expected the CPI to rise 3.1%.

The core CPI, which excludes volatile food and energy prices, was also weaker than expected, rising 2.6% over 12 months. An increase of 3% was expected.

Monthly increases were also smaller than expected, with both headline and core CPI rising 0.2%, compared with estimates of 0.3%.

This is the first report to cover the period when the U.S. government was closed. The disruption halted the data collection process at this time. This also led to the cancellation of the October CPI release. This data was originally scheduled to be released on December 10th.

Because October’s CPI was omitted, Thursday’s report did not include all the usual data points of a typical CPI release. The BLS said it was unable to collect the October data retroactively but used some “non-survey data sources” for the index calculations.

On a 12-month basis, food prices increased by 2.6% and energy prices increased by 4.2%. Housing costs, which account for about a third of the index’s weight, rose 3%, indicating progress toward the Fed’s overall inflation target of 2%. Shelter had contributed significantly to the increased inflation values.

Economists may be hesitant to interpret this report too much as the start of a downward trend in inflation, as the release does not include comparable data for October.

Still, investors analyzed the report looking for clues about future monetary policy moves from the Federal Reserve. The Fed cut its federal funds rate by 25 basis points for the third consecutive month earlier this month.

“A tame consumer price index will strengthen the Fed’s focus on protecting the labor market. And that means a Fed ‘put’ on the economy is now in effect,” Tom Lee, head of research at Fundstrat, said in a note ahead of Thursday’s release. “In other words, if the Fed is concerned about downside risks to the economy, the Fed ‘put’ comes into play and this would cause stocks to rise.”

The chances of a rate cut in January remained slim, but traders began to price in a higher probability of a rate cut in March. CME Group’s FedWatch tool showed a 58.3% chance of a rate cut for the month, up from around 53.9% on Wednesday.

Stock futures jumped following the release. S&P 500 futures were up about 0.5% at 8:39 a.m. ET. A gain would end a four-day losing streak for the benchmark index. Treasury yields have fallen, with the 10-year Treasury yield most recently at around 4.11%.

—CNBC’s Sean Conlon contributed reporting.

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Federal Reserve Governor Christopher Waller is scheduled to speak at the Yale CEO Summit on Wednesday.

Waller is one of five finalists to replace Fed Chair Jerome Powell when his term expires in May. He is scheduled to be interviewed by President Donald Trump this week, CNBC’s Steve Liesman reported. However, Trump has signaled that Kevin Warsh and Kevin Hassett are the leading candidates to replace Powell.

Waller, who was appointed to the Fed’s board by Trump and confirmed by the Senate in late 2020, has emerged this year as one of the central bank’s strongest voices pushing for interest rate cuts. The Fed cut interest rates by a quarter point at each of its last three meetings. Waller disagreed back in July when policymakers decided to keep interest rates unchanged.

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A staff member prepares for the arrival of Chinese Vice Prime Minister Ding

Wang Zhao | Afp | Getty Images

China announced lower tariffs on pork imports and pork by-products from the European Union on Tuesday after completing a year-long anti-dumping investigation into European pork imports.

The new tariffs – which range from 4.9% to 19.8% for dozens of European pork exporters – will take effect from Wednesday and last for five years, according to China’s Commerce Ministry.

At the beginning of September, China imposed temporary anti-dumping duties of up to 62.4% in the form of cash deposits on pork imports from the EU.

Trade tensions had increased after Brussels imposed tariffs of up to 45% on electric vehicles imported from China in October last year, prompting Beijing to describe it as protectionist.

China launched the anti-dumping investigation in June last year as part of a countermeasure to the EU’s punitive measures against its electric vehicle sector.

S&P Global estimates that the EU is the world’s largest pork exporter, selling around 13% of its annual production abroad, with China the single largest buyer.

European leaders have highlighted Beijing’s growing trade imbalance with key trading partners including the EU, as tariff tensions with Washington prompted Chinese exporters to redirect their shipments to markets outside the US.

China’s trade surplus hit an annual record of more than $1 trillion in November.

Beijing’s restrictions on rare earth exports had also led to shortages of the critical minerals among several European manufacturers looking to diversify their supply chains from China. The agreement China reached with the US in late October has allayed some concerns as Beijing has reportedly started issuing licenses for such exports.

There have also been disputes between the EU and China over semiconductor exports after the Netherlands took control of Nexperia, a Chinese company based in the country. Last week, Beijing called on the Dutch government to send a delegation to China for further negotiations.