The Fed expected rate cuts this year. Now it’s bracing for another inflation fight

Kevin Warsh, chairman of the Federal Reserve, during a news conference following a Federal Open Market Committee meeting in Washington, Oct. 28, 2026.Al Drago | Bloomberg | Getty ImagesAt the start of the year, the Federal Reserve was sanguine about the American economy. Inflation seemed to be trending down. The shock from President Donald Trump's tariffs was abating. Economists projected the central bank could lower rates.

Instead, the Fed was forced to raise rates in September for the first time since 2023, hiking 25 basis points as inflation, which has run above the Fed's 2% target for more than five years, reemerged as its bugbear.

As the Federal Open Market Committee's final meeting looms on Dec. 8, October's consumer price index was higher than expected: 0.4% month-on-month versus the 0.3% predicted in a Dow Jones survey of economists. So-called core CPI increased 0.3% against a 0.2% forecast.

Now, traders are certain the Fed will raise rates next month, according to the CME Fedwatch tool. The only question is by how much. Almost 88% of traders expect another 25-basis-point hike. The rest expect a half-point hike.

Inflation and the cost of living

The cost of living has been a top issue on Americans' minds. Vice President JD Vance cited it as a reason the Republican Party lost so much ground in the midterm elections.

"We've got a real inflation issue on our hands that has been developing," Chicago Federal Reserve President Austan Goolsbee said in an interview with "PBS NewsHour" on Tuesday, adding that prices are "on everyone's mind" and calling inflation readings "borderline disturbing."

Fed Governor Christopher Waller said Tuesday that a hot inflation report could push him toward advocating for a half-point increase in December, adding this should be on the table if core CPI were "around 0.3%."

Christopher Waller, governor of the US Federal Reserve, speaks during the C. Peter McColough Series on International Economics at the Council on Foreign Relations in New York, US, on Thursday, Oct. 16, 2025. Michael Nagle | Bloomberg | Getty Images"The latest CPI print strengthens the near-term case for tightening, even though a 25 basis point hike should be sufficient for December," Chester Liaw, G7 Economist at OCBC Group Research, said on Thursday.

Even with a hike, inflationary impulses could remain, Robert Sockin, chief U.S. economist at PGIM, said in a note Thursday.

With the Democrats in control of Congress next year, Trump could use executive actions to increase tariffs, Sockin said.

Since the labor market remains stable, Sockin said, he doesn't expect rising interest rates this year to derail "significant portions" of the U.S. economy, leaving open the door to future increases.

"We continue to expect the Fed to hike rates by 100 bps with the next increase coming in December and quarterly thereafter," Sockin added.

Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.