US core personal consumption expenditures (PCE) price index rose 0.4% month on month in December. The forecast was 0.3%.
The reading was 0.1 percentage points above the forecast. It indicates faster monthly growth in core prices than expected.
Implications For Fed Policy
The higher-than-expected Core PCE data we received for December 2025 was the first signal that inflation was not cooling as quickly as we had hoped. It suggested the path to the Fed’s 2% target would be uneven. This has forced a major reassessment of how soon the Federal Reserve might begin cutting interest rates in 2026.
This concern was amplified by the January 2026 inflation data released last week, which showed core CPI remaining stubbornly high at 3.1%. With the labor market also showing continued strength, the argument for the Fed to delay any policy easing is becoming much stronger. The upcoming January PCE report, due at the end of next week, is now a critical event.
Given this uncertainty, we should anticipate higher volatility in interest rate markets for the next several weeks. The MOVE Index, which tracks Treasury market volatility, has already climbed to its highest level since last October. Options strategies that profit from price swings, rather than direction alone, could be beneficial.
The market has aggressively repriced rate cut expectations since the start of the year. Fed funds futures now indicate only a 25% probability of a rate cut by the June 2026 meeting, a steep drop from the 70% chance priced in just six weeks ago. This shift favors trades positioned for rates remaining elevated, such as buying puts on longer-duration bond funds.
This environment is reminiscent of what we witnessed in early 2024, when a string of strong economic reports quickly erased expectations for imminent rate cuts. In that period, the 2-year Treasury yield rose significantly as the market aligned with the Fed’s more cautious outlook. We may be seeing the start of a similar move now if inflation data continues to surprise to the upside.
