Inflation was flat last month, reducing chance of rate cut
The Fed is unlikely to cut interest rates in January, but it might in March. A bigger unknown? How a DOJ probe will affect monetary decisions going forward.
Key points:
- The core Consumer Price Index rose 2.6% in December, unchanged from November, making a rate cut unlikely when the Fed meets later this month.
- Mortgage rates could drift lower in anticipation of a potential March rate cut, but they rose slightly following today's inflation report.
- The Federal Reserve is facing a DOJ investigation that has the potential to undermine the Fed’s independence, some say — and that could mean higher rates in the long term.
- Meanwhile, new home sales were up 8% year-over-year in October, according to a delayed report released on Jan. 13.
With the December inflation report largely meeting expectations, a January interest rate cut remains unlikely — but it does raise hopes for a short-term rate reduction in time for the spring homebuying season.
The Consumer Price Index (CPI) rose 2.7% year-over-year, according to the U.S. Bureau of Labor Statistics. If you take away the more volatile energy and food sectors, inflation rose 2.6% year-over-year, largely in line with the November report.
March interest rate cut still 'in play'
The data doesn't fundamentally change the near-term outlook for the Federal Reserve when it meets later this month, according to Sam Williamson, senior economist at First American. Analysts expect the Fed will hold steady on rates as it waits to see how the three 25-point cuts made in late 2025 impact the economy.
"It does, however, keep [a March rate cut] in play if upcoming inflation and labor market data continue to move in the right direction," Williamson said, noting that mortgage rates could drift lower in anticipation of a possible short-term interest rate cut in March.
But for the moment, rates have edged up: Mortgage News Daily put the average 30-year fixed-rate mortgage at 6.07% following the CPI report on Jan. 13, up from 6.01% the day before.
Fed investigation could push rates higher
The "ho-hum" report should be good news for homebuyers, according to Jake Krimmel, senior economist at Realtor.com. While still above the Fed's target rate of 2%, the price moderation would improve the purchasing power of consumers as wages rise.
The bigger concern, Krimmel noted, is the uncertainty around the Fed's future in light of the U.S. Department of Justice's investigation into the agency. The DOJ served the Fed with grand jury subpoenas on Jan. 9 related to Fed Chair Jerome Powell's June testimony to Congress regarding renovations at the Fed's headquarters. Federal Housing Finance Agency Director Bill Pulte previously requested a congressional investigation of the matter, accusing Powell of "deceptive Senate testimony."
Powell called the claims "pretexts" for the Trump administration's true beef with the Fed: The agency's insistence on setting rates "based on our best assessment of what will serve the public, rather than following the preferences of the President."
The DOJ investigation could determine whether the Fed continues to operate independently, "or whether instead monetary policy will be directed by political pressure or intimidation," Powell added.
The administration's efforts could backfire, however. "Any erosion of Fed independence, or the perception that the Fed is no longer data-dependent, risks pushing long-term interest rates higher by lifting inflation expectations," Krimmel said in an email.
New home sales show spark in September, October
In other economic news, new home sales data — which was delayed by the government shutdown last fall — showed surprising strength in September and October, according to the U.S. Census Bureau.
The annualized pace for new home sales exceeded consensus expectations of around 710,000, according to Williamson, hitting 738,000 in September — nearly 19% above 2024's pace — and 737,000 in October.
The rise in sales may be related to falling home prices. The median new home price in October 2025 was $392,300, 3.3% lower compared to September and down 8% year-over-year — and significantly lower than the median existing home price, which was $415,200 in October 2025, according to Joel Berner, senior economist at Realtor.com.
"Two main things are at play here: Builders are more motivated than regular homeowners, many of whom are reluctant to cut prices and would rather delist their home than sell below their target, and builders continue to deliver smaller and more affordable new homes in more affordable areas," Berner said.
The increase in new home sales was largely concentrated in the South and Midwest, while activity was sluggish in the Northeast and West.