Fed's December Rate Cut Now Looks Like a Mistake
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- The December 2025 rate cut — a third consecutive reduction that passed with only two hawkish dissents from Kansas City's Jeff Schmid and Chicago's Austan Goolsbee — now looks like a mistake: core PCE inflation has reaccelerated to a 4.1% annual rate through April 2026, far above the 2.5% median projection Fed officials issued at the time of the decision.
- Overall PCE inflation is clocking a 5.5% annual rate through the first four months of 2026, driven higher by an energy price surge tied to the Iran war — and even excluding that energy shock, inflation has exceeded Fed projections.
- The labor market has defied the softening fears that motivated the cut, with unemployment stable at 4.3% for three consecutive months and job creation averaging 114,000 per month in 2026, up dramatically from roughly 10,000 per month in 2025.
- Governor Christopher Waller, who in November 2025 called a December cut "additional insurance against an acceleration in the weakening of the labor market," reversed course last month, saying inflation will drive his policy view and that he "would not hesitate" to raise rates if expectations become unanchored.
- Markets are now pricing meaningful odds that the Fed will have to reverse course and raise rates in 2026, abandoning the easing trajectory Powell stitched together in December.
- Kevin Warsh faces his first FOMC meeting next week inheriting a rate setting the Axios analysis describes as "improperly tuned" — offering stimulus when conditions arguably call for neutral or restrictive policy.
Why it matters: Warsh's debut meeting lands with core PCE running at 4.1% — 1.6 percentage points above the Fed's own December projection of 2.5% — and a labor market that has stabilized at 4.3% unemployment, meaning the monetary stance he inherits is stimulative precisely when inflation is reaccelerating. Waller's pivot from dove-on-the-cut to "would not hesitate" to hike marks an internal Fed consensus shift toward inflation fighting, and markets are now pricing rate hikes in 2026, a full reversal from the December easing path.
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