Economic Signals Point to Stability as Inflation Eases and the Fed Pauses

Matthew Rubin Chief Investment Officer

 

1. Recent labor data showed fewer layoffs and slower hiring, pointing to a stable but less dynamic job market.
2. December inflation data offered cautious reassurance that underlying price pressures eased after several distorted readings.
3. The release of December’s inflation data reinforced expectations that the Fed will pause in January while keeping the door open to gradual easing later in 2026.

 

1. Labor Market Holds Steady as Hiring Slows

Initial jobless claims declined last week to 198,000, below expectations and still well under long-term historical norms, signaling that layoffs remain limited.¹ Continuing claims also edged lower to about 1.88 million, but remain above both pre-pandemic averages and 2022 lows.¹ This gap suggests that unemployed workers seeking new positions may be facing an extended search.

The claims data followed the latest employment report, which showed that nonfarm payrolls increased by roughly 50,000 in December.¹ That brought average monthly job growth for 2025 to just under 50,000, marking a clear slowdown from the prior year. Even so, the unemployment rate slipped to 4.4%, reinforcing the picture of a labor market with fewer hires but also limited layoffs.¹

Overall, conditions last week pointed to steady economic activity rather than a sharp deterioration. Looking ahead, job growth appears likely to remain moderate, with payroll gains slowing but layoffs staying contained and unemployment settling near the mid-4% range.

2. December Inflation Data Show Early Signs of Improvement

Inflation data released last week offered a clearer view after several months of disruption. The October and November consumer price reports were affected by data-collection issues tied to the government shutdown, making trends harder to interpret. The December Consumer Price Index (CPI) report, therefore, marked the first dependable snapshot in some time, and the results were modestly encouraging overall.

The CPI rose 2.7% in December from a year earlier, unchanged from November and in line with expectations.¹ Core inflation, which excludes food and energy, slowed to 2.6% year-over-year, supported by a relatively modest monthly increase.¹ These figures suggest that underlying price pressures continued to ease gradually, even though progress remained uneven across categories. Overall, the December CPI data pointed to cooling inflation trends beneath the surface, tempered by persistent pressure in essential consumer goods.

3. The Fed Walks a Narrow Path Ahead of January Meeting

Recent inflation readings did little to shift expectations for monetary policy heading into the Federal Reserve’s January 27th meeting. Communications from the central bank point to a pause after its earlier round of interest rate cuts, and market pricing continues to reflect little expectation of a move at that meeting.

At the same time, signs of gradually easing inflation support the case for cautious policy flexibility later in the year. Cooling price pressures, combined with the latest labor-market report showing subdued hiring, suggest that economic momentum has remained moderate rather than overheated. Against this backdrop, investors continue to assign modest odds to a rate cut in early spring, with probabilities rising further into midyear.

Market attention was briefly unsettled last week by news of Justice Department scrutiny of Fed Chair Jerome Powell, which raised questions about potential political pressure on monetary policy. Subsequent responses from lawmakers across the political spectrum appeared to temper those concerns, helping stabilize expectations about the Fed’s independence.

Overall, conditions last week underscored the Fed’s balancing act. Policymakers appeared poised to hold steady in January while remaining attentive to incoming data that could justify a gradual easing of interest rates later in 2026.

For the period ending 1/16/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ U.S. Bureau of Labor Statistics

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The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. The Bureau of Labor Statistics (BLS) calculates the CPI as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. The CPI is a measure of inflation and deflation. The CPI report uses a different survey methodology, price samples, and index weights than the producer price index (PPI).
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