Last week, the US Federal Reserve cut interest rates again, continuing its slow pivot toward easier policy.
This week, the inflation data arrived – and instead of clarity, it raised more questions.
Economists aren’t arguing about where inflation is going yet; they’re arguing about whether the numbers themselves can be trusted.
On December 10, the Fed cut interest rates by 0.25 percentage points, bringing the federal funds target range to 3.5%–3.75% – the third cut in a row.
The Fed’s key reason (in plain English): it thinks the downside risk is shifting more toward jobs and growth, even though inflation is still not fully “settled”.
In its statement, the Fed explicitly said downside risks to employment had risen in recent months, and that it’s trying to balance both inflation and jobs.
So why cut now? The Fed’s basically trying to thread a needle:
- The labour market has been softening (not collapsing, but cooling).
- Inflation has come down from the peak, but it’s still not perfectly at target
- And after keeping rates restrictive for a long time, the Fed is trying to avoid “oops, we overdid it and broke something.”
But the plot twist: the inflation data the market was waiting for arrived this week… and it came with an asterisk the size of Marina Bay Sands.
Here’s what happened: the US government shutdown earlier in Q4 (October 1 to November 12) disrupted the Bureau of Labor Statistics’ data collection for CPI. The BLS itself has explained that most CPI operations – including data collection – were suspended during that period.
So when November’s CPI showed inflation at 2.7% year-on-year, a lot of economists said: “Okay, but how much of this is real… and how much is measurement noise?”
Because some prices had to be estimated/imputed, and the collection window got skewed (Black Friday discount season doesn’t exactly give you a clean read on underlying inflation).
The deeper story isn’t “inflation is fixed” vs “inflation is back.”
It’s that policy decisions (rate cuts) are happening while the data is less reliable than usual – and that can change market behaviour in sneaky ways.
When inflation data is clean, markets argue about the direction. When inflation data is messy, markets argue about the reality. That’s how you get big confidence swings: one camp says “cuts are coming, risk-on,” another says “the numbers are distorted, don’t celebrate yet,” and everyone starts anchoring to vibes, positioning, and headlines.
If you want one simple takeaway: rate cuts last week were the Fed managing economic risk; inflation this week was the market realising the dashboard might be glitching – and that makes the next few months noisier than people think.
When rates get cut and inflation data turns unreliable, the biggest risk isn’t being wrong about the economy – it’s assuming the path forward is clear.
Right now, the market wants a neat story: inflation is falling, the Fed has started cutting, and rates will just keep drifting lower.
But that’s not actually what the Fed is signalling. What it’s signalling is conditional easing.
Rates are biased lower, yes – but they’re on a leash.
After this week’s messy inflation data, that leash has tightened. The Fed doesn’t want to cut aggressively, only to discover a few months later that inflation was never really under control.
So the most likely path from here is pause first, then cautious, spaced-out cuts, once cleaner and more consistent data comes through. If inflation stays sticky once data normalises, rates may simply stay higher for longer than markets hope.
That’s the backdrop I’m working with and have been working with – both for myself and for clients.
So, what’s next?
First, I’m not treating these rate cuts as a green light to make big, one-way bets on duration.
Bond funds finally offer income again, which is great. And yes – if rate cuts continue smoothly, longer-duration bond funds should benefit from both income and NAV gains.
But in a world where inflation data is noisy and the pace of cuts is uncertain, longer-duration funds also carry meaningful downside if yields move back up.
So for now, I’m keeping fixed income exposure balanced – leaning toward income and capital stability, while preserving the flexibility to extend duration more aggressively once the direction of inflation and policy is clearer.
Second, I’ve been positioning portfolios for messiness.
When inflation uncertainty is high, correlations can behave badly. That’s why diversification actually matters again.
When inflation is uncertain, correlations behave badly. That’s why I’m deliberately keeping exposure to assets that can hold value if inflation surprises on the upside or if rate volatility stays elevated.
I don’t need every asset to “win”; I need fewer things to blow up at the same time.
Third, I’m mentally reframing rate cuts as risk management, not stimulus.
The Fed is trying to avoid overtightening and breaking the economy – not declaring victory over inflation.
That distinction matters.
It means rates may drift lower eventually, but with long pauses, reversals of optimism, and plenty of volatility in between.
For clients, the message is simple: we’re not positioning for a crisis, and we’re not positioning for a straight-line rally either.
We’re positioning for a world where data is noisy, policy signals are conflicted, and patience is an asset.
That means staying invested, staying flexible, and staying comfortable with not having a clean answer yet.