Fed’s Preferred Inflation Gauge Shows Steady Cooling

The latest U.S. inflation and consumer-sentiment data indicate that price pressures continue to ease while spending momentum softens moderately. At the same time, policymakers and geopolitical dynamics are flashing meaningful new signals. The Feds preferred inflation metric—core PCE—came in largely as expected, while consumer sentiment rebounded from recent lows. As a result, market expectations for a policy shift have strengthened noticeably. In parallel, the U.S. strategic posture abroad is undergoing significant recalibration, with U.S.–China relations potentially entering a new structural phase.

Inflation Trends: Core PCE Remains on a Downward Path

The September PCE price index rose 0.3% MoM and 2.8% YoY, both matching consensus expectations. Core PCE increased 0.2% MoM, with the annual rate easing slightly to 2.8% from 2.9% previously. Overall, U.S. inflation has shown a consistent multi-month cooling trend with no signs of re-acceleration, reinforcing confidence that inflation pressures remain manageable.

Personal income grew faster than expected, reflecting resilience in employment and wage fundamentals. However, personal spending undershot forecasts, suggesting that consumers are beginning to recalibrate their behavior under a prolonged high-rate environment. Taken together, the U.S. economy continues to exhibit classic soft-landing characteristics—“disinflation with gradually moderating demand.”

Consumer Sentiment Recovers; Inflation Expectations Ease

The University of Michigans preliminary December Consumer Sentiment Index rebounded to 53.3 from 51, ending four consecutive months of decline. More importantly, both short-term and long-term inflation expectations fell:

• 1-year inflation expectation: down to 4.1% (from 4.5%)

• 5-year inflation expectation: down to 3.2% (from 3.4%)

Both measures are at their lowest levels year-to-date, indicating consumers are less worried about price pressures and increasingly optimistic about personal finances and labor market conditions. Lower inflation expectations also help stabilize the pricing environment and serve as important leading indicators for future inflation trends.

Policy Signals: Growing Calls for Rate Cuts

Kevin Hassett—often referred to as the “shadow Fed chair” and former White House chief economic adviser—stated that current economic conditions justify the Fed “carefully returning to rate cuts,” projecting a 25-bp cut at next weeks meeting. He noted that the recent government shutdown imposed greater-than-expected drag on the economy but expects a stronger rebound in Q1 2025. Hassett also argued that rapid advancements in AI could lift U.S. productivity toward 4% in 2025.

On the political front, Hassett endorsed Treasury Secretary Bassetts proposal to require regional Fed president candidates to reside in their districts for at least three years—a move seen as an important governance reform that improves regional representation and oversight. These developments collectively signal that the policy community increasingly views the rate-cut window as “maturing.”

Geopolitical Repositioning: U.S. Strategic Outlook Undergoes Its Biggest Shift in a Decade

The White House released the 2025 National Security Strategy, marking one of the most significant strategic realignments in at least ten years. Key points include:

• The U.S. will no longer pursue global hegemony and will redistribute strategic resources.

• U.S.–China relations will be redefined based on “reciprocity and equality,” acknowledging China as a “near-peer” power.

• Greater strategic focus will be placed on Latin America.

• Europe received an unusually stern warning, stating the region faces a “risk of civilizational decline” unless it adjusts policies to maintain strategic alignment with the U.S.

The report implies a phase of strategic contraction and recalibration as the U.S. manages constraints across its economic, military, and diplomatic resources. A re-anchoring of U.S.–China relations could become one of the most important variables shaping future global financial markets.

Overall Economic Assessment

The U.S. economy currently exhibits four major trends:

• Inflation is easing steadily with no signs of renewed acceleration.

• Consumer sentiment is improving, and inflation expectations are meaningfully softening.

• Policymakers are increasingly signaling rate-cut readiness.

• Global strategic repositioning suggests a more stable U.S.–China dynamic ahead.

These factors strengthen market conviction that the Fed may cut rates at next weeks meeting and provide greater clarity on the policy path for 2025. The probability of a successful soft landing continues to rise, while geopolitical restructuring remains a key market driver to watch.