The closing month of 2025 has delivered a macroeconomic juncture of profound complexity, defined by the collision of aggressive political narrative, questionable statistical methodology, and a pivotal shift in monetary policy. At the center of this maelstrom stands Kevin Hassett, Director of the National Economic Council and the likely nominee for the next Chair of the Federal Reserve. Following the release of the November 2025 Consumer Price Index (CPI)—a report heavily distorted by the preceding 43-day government shutdown—Hassett has championed a narrative of decisive victory over inflation, citing a three-month annualized core inflation rate of 1.6% to declare that the "Federal Reserve's work is done".
This report provides an exhaustive, multi-dimensional analysis of the current economic landscape. It dissects the validity of Hassett’s "1.6% reality" against the backdrop of a "dirty" CPI report where crucial shelter data was imputed as zero. It explores the implications of the Federal Reserve's December 10 decision to cut rates to a range of 3.50%–3.75% amidst a fracturing consensus within the Federal Open Market Committee (FOMC). Furthermore, it scrutinizes the divergent signals emanating from a labor market where unemployment has risen to 4.6%, threatening the "soft landing" thesis that equity markets have so enthusiastically priced in.
Through the lens of historical parallels—specifically the 1995 "insurance cut" cycle—and the emerging political economy of the second Trump administration ("Trump 2.0"), this document offers a roadmap for investors navigating the transition from a restrictive monetary regime to one defined by "supply-side" optimism and fiscal dominance.
The Statistical Mirage – Deconstructing the November 2025 CPI
The foundation of the current market rally and the administration's victory lap is the November 2025 CPI release. To accept the headline numbers at face value is to ignore one of the most significant statistical anomalies in the history of the Bureau of Labor Statistics (BLS).
The Anatomy of a "Dirty" Report
On December 18, 2025, the BLS reported that the headline CPI rose by 2.7% year-over-year, while the core CPI (excluding food and energy) rose by 2.6%. These figures were significantly below the consensus expectations of 3.1% and 3.0%, respectively, sparking an immediate rally in risk assets.
However, these numbers emerged from a broken data collection process. The federal government shutdown, which lasted 43 days through October and early November, forced the BLS to suspend field operations. Consequently, no data was collected for October 2025. When operations resumed, the BLS could not retroactively collect this missing data. Instead, they calculated November's index by comparing it to September's, effectively creating a two-month percentage change, while relying on massive imputation to fill the gaps.
Economic analysts have characterized this as a "dirty report" or "whacky data" because the standard rigor of the CPI was compromised. Diane Swonk, chief economist at KPMG US, noted that the BLS "carried forward" September numbers to October, which "tends to zero out a change of up or down in any given data point". This methodology introduces a downward bias in an inflationary environment, as it assumes price stability in sectors where costs typically rise incrementally.
The Housing Void: Imputation and the 1.6% Calculation
The most critical distortion occurred in the shelter component, which accounts for approximately one-third of the headline CPI and 40% of the core basket. In a standard month, the BLS surveys thousands of rental units. For the missing October period, it appears the BLS effectively entered a 0% change for rents and Owners' Equivalent Rent (OER).
This "zeroing out" of housing inflation is the primary driver behind the collapse in the core inflation metrics.
- Official Data: The report implies that shelter costs were flat or negligible for half of the two-month period.
- Market Reality: Private sector data from Zillow and Apartment List suggests that while rent growth has decelerated, it remains positive, tracking at a 3.6% annualized pace.
It is from this distorted dataset that Kevin Hassett derived his "1.6%" figure. The three-month annualized rate of core inflation dropped to 1.6% largely because the heavy weight of the housing component was artificially depressed by the shutdown methodology. While mathematically accurate based on the released tables, it acts as a "statistical mirage," potentially understating the true underlying inflation trend which likely sits closer to 2.5%–2.8%.
Sectoral Breakdown: Deflation or Noise?
Beyond housing, the "dirty" nature of the report affected other categories, though some genuine disinflationary signals emerged:
- Airline Fares: Dropped 6.6% over the two-month period. This is a volatile category often driven by fuel costs and seasonal adjustment quirks, but the magnitude of the drop contributed significantly to the lower core print.
- Hotels/Lodging: Fell 1.7%, signaling potential softness in consumer discretionary spending.
- Apparel: Declined 0.7%, possibly reflecting discounting ahead of the holiday season to clear inventory.
- Motor Vehicle Insurance: Decreased 0.4%, a reversal of the steep hikes seen in 2023–2024.
Conversely, the "Supercore" measure (services excluding energy and housing)—often cited by Fed Chair Powell as a proxy for wage-driven inflation—showed cooling, but the reliability of this signal is tainted by the same data collection gaps that plagued the broader services sector.
| Metric | September 2025 (Pre-Shutdown) | November 2025 (Post-Shutdown) | Consensus Forecast | Impact of Imputation |
|---|---|---|---|---|
| Headline CPI (YoY) | 3.0% | 2.7% | 3.1% | High (Energy/Food data carried forward) |
| Core CPI (YoY) | 3.0% | 2.6% | 3.0% | Critical (Shelter zeroed out) |
| 3-Month Annualized Core | ~2.9% | 1.6% | N/A | Distorted (Basis for Hassett's claim) |
| Shelter Inflation | 3.5% | Implied ~0% (Oct) | 3.4% | Artificial Drop |
Table: The Statistical Divergence of the November CPI
The Hassett Doctrine – "The Price Problem is Solved"
Kevin Hassett’s interpretation of the data is not merely an economic observation; it is a political maneuver designed to cement the narrative of the "Trump 2.0" economic success and pave the way for a regime change at the Federal Reserve.
The "Astonishingly Good" Narrative
In his appearances on Fox Business and CNBC following the release, Hassett labeled the report "astonishingly good" and an "absolute blockbuster". His rhetoric serves to anchor public and market expectations around the idea that the inflationary episode of the early 2020s is definitively over.
"I'm not saying we're going to declare victory yet on the price problem, but this is just an astonishingly good CPI report," Hassett stated, emphasizing that "wages are growing faster than prices".
This narrative accomplishes three strategic goals:
- Vindication of Fiscal Policy: It counters critics who warned that the administration's tariffs and tax cuts (the "OBBBA" legislation) would reignite inflation. By pointing to 1.6% core inflation alongside 3.1% GDP growth, Hassett argues that "supply-side" expansion is working.
- Pressure on the Fed: It explicitly calls for the Fed to "adjust rate expectations," framing any reluctance to cut as a policy error. "The Federal Reserve's work is done," Hassett declared, signaling that the restrictive stance is now obsolete.
- Forward Guidance: It prepares the ground for his potential chairmanship. By anchoring to the 1.6% figure, Hassett is defining the "neutral" state of the economy as one of high growth and low inflation, implicitly rejecting the Phillips Curve trade-off that has guided traditional central banking.
The 1% Inflation Target
Perhaps the most radical aspect of the "Hassett Doctrine" is his suggestion that the US economy should return to—and target—a 1% inflation rate.
"We got 3% growth and 1% inflation after a big supply side shock [in the late 2010s]," Hassett argued. "And I think that's what could happen again".
This stands in stark contrast to the Federal Reserve's formal 2% average inflation target (AIT). Hassett’s preference for 1% inflation suggests a belief that technological deflation (AI, productivity) and deregulation can suppress prices even as the economy expands. If adopted as policy, this would represent a seismic shift in central bank strategy, potentially leading to tighter monetary policy than expected if inflation hovers at 2.5%, or looser policy if he believes deflationary forces are naturally dominant and need accommodation.
Housing Policy as a Supply-Side Tool
Acknowledging the "sticky" nature of housing costs (despite the zeroed-out data), Hassett teased a "big announcement" regarding housing. The administration plans to use regulatory incentives to reward states that streamline homebuilding. This aligns with the supply-side philosophy: solving inflation through increased capacity rather than demand destruction. While this may not impact the CPI in the short term, it reinforces the administration's argument that structural reforms, not high interest rates, are the solution to the cost of living.
Monetary Policy in Transition – The Fed's Calculated Risk
The Federal Reserve is operating in a fog of war. The Committee is aware of the data deficiencies but has chosen to prioritize the signal from the labor market over the noise of the inflation print.
The December 10 Decision
The FOMC voted to lower the federal funds rate by 25 basis points to a target range of 3.50%–3.75%. This was the third consecutive cut, establishing a clear easing trend. The decision, however, was marked by significant internal dissent, revealing the fragility of the consensus:
- The Dissenters: Governor Stephen Miran voted for a more aggressive 50 basis point cut, arguing that the Committee was "behind the curve" on the labor market. Conversely, Presidents Austan Goolsbee and Jeffrey Schmid voted for no change, preferring to wait for cleaner data post-shutdown.
- The Consensus: The majority, led by Chair Powell, opted for the middle path—a 25bps "insurance cut" to sustain the expansion while acknowledging the data limitations.
The Dot Plot and the 2026 Outlook
The Summary of Economic Projections (SEP) released in December shows a Committee slowly capitulating to the market's view, though still lagging behind the aggressive pricing of futures traders.
- Median Projection: The dot plot implies the fed funds rate will fall to 3.25%–3.50% by the end of 2026.
- Market Pricing: Futures markets, emboldened by the CPI report, are pricing in cuts to below 3.0% by mid-2026.
- GDP Upgrade: The Fed upgraded 2026 GDP growth forecasts to 2.3%, anticipating a rebound as shutdown effects fade and fiscal stimulus kicks in.
This divergence between the Fed (cautious easing) and the Market (aggressive easing) creates volatility. If inflation data "snaps back" in January as imputation effects wear off, the market may be forced to re-price, causing a sharp backup in yields.
The Real Rate Conundrum
With the nominal policy rate at 3.75% (upper bound) and Core CPI at 2.6%, the real policy rate is approximately 1.15%.
$$Real Rate = 3.75% - 2.6% = 1.15%$$
This level is close to most estimates of "neutral" (r*). However, if one accepts Hassett’s 1.6% annualized inflation figure, the real rate is 2.15%. A real rate >2% is historically restrictive and typically associated with inducing recessions. This mathematical discrepancy drives the urgency of Hassett’s call for cuts: if the true inflation impulse is 1.6%, the Fed is currently strangling the economy with tight money.
The Labor Market Conundrum – 4.6% and Rising
The pivot in Fed policy is driven less by the questionable inflation victory and more by the unambiguous deterioration in the labor market. The dual mandate has shifted; inflation is secondary, employment is primary.
The "No Hire, No Fire" Dynamic
The November jobs report showed a net gain of 64,000 jobs, a rebound from the shutdown-induced loss of 105,000 in October. However, the unemployment rate ticked up to 4.6% from 4.4% in September.
This rise is symptomatic of a "no hire, no fire" equilibrium:
- Labor Hoarding: Firms are reluctant to lay off workers (low firings) due to the difficulty of recruiting post-pandemic.
- Hiring Freeze: Simultaneously, uncertain demand and high costs have led to a freeze in new headcount (low hiring).
- Entrants vs. Incumbents: As Ryan Sweet of Oxford Economics explains, the rise in unemployment is largely driven by new entrants (recent graduates, re-entrants) joining the labor force and failing to find work, rather than existing workers losing jobs. While less immediately catastrophic for consumer spending than mass layoffs, this dynamic erodes the "tightness" of the labor market and suppresses wage leverage.
The Sahm Rule and Recession Risk
An unemployment rate of 4.6% is the highest since late 2021. While the "Sahm Rule" (which signals recession when the 3-month moving average of the unemployment rate rises 0.5% above its 12-month low) has not been officially triggered in its classic recessionary sense due to the supply-side nature of the rise, the trend is undeniable.
J.P. Morgan forecasts that the unemployment rate could peak in the mid-4% range in 2026. However, history suggests that once the unemployment rate begins to rise by 0.5% or more, it rarely stops at a benign plateau; it tends to accelerate via a feedback loop of reduced spending and corporate retrenchment. This is the "tail risk" that the Fed's December cut aims to insure against.
Wage Growth and Purchasing Power
Average hourly earnings rose 3.5% year-over-year in November.
With inflation at 2.7%, real wage growth is +0.8%. This positive real wage growth is the "soft landing" fuel. It allows consumption to continue even as job growth slows. Hassett’s narrative leans heavily on this: "wages growing faster than prices" is the definition of a healthy economy for the working class. However, if unemployment drifts toward 5%, aggregate income growth will stall, regardless of hourly wage rates.
Historical Parallels – 1995 vs. 2025
The current economic moment is frequently compared to the "soft landing" of 1995, the only modern instance where the Fed significantly tightened policy and then eased without causing a recession.
The 1995 Analog
In 1995, under Alan Greenspan, the Fed raised rates to 6.0% to preempt inflation, then pivoted to cut rates by 75 basis points (to 5.25%) as the economy slowed.
- Result: The economy re-accelerated, leading to the late-90s productivity boom.
- 2025 Comparison: The Fed raised rates to 5.5%, and has now cut by 75 basis points (to 3.75%). The trajectory is eerily similar.
Critical Divergences
While the rate path mimics 1995, the labor market does not.
-
1995: The unemployment rate was falling during the pivot (from ~5.7% to ~5.4%).
-
2025: The unemployment rate is rising (from 3.4% lows to 4.6%).
This divergence suggests the 2025 "landing" is more precarious. In 1995, the Fed was cooling an overheating engine. In 2025, the Fed is trying to restart a stalling one. The margin for error is significantly narrower today, as the buffer of labor demand is thinner.
The Productivity Wildcard
Hassett’s optimism relies on a repetition of the late 1990s productivity miracle (then Internet-driven, now AI-driven). If AI adoption mirrors the internet boom, potential GDP could rise, allowing the economy to sustain 3% growth without inflation. J.P. Morgan’s "AI Lift and Economic Drift" outlook highlights this possibility, suggesting that capital expenditures on AI could offset the drag from high rates.
Political Economy of "Trump 2.0" – The OBBBA Factor
The economic data must be contextualized within the policy framework of the incoming administration. The "One Big Beautiful Bill Act" (OBBBA) represents a heterodox mix of fiscal stimulus and protectionism.
Fiscal Stimulus vs. Monetary Restriction
The OBBBA includes extensions of the Tax Cuts and Jobs Act (TCJA) and new incentives for domestic investment. Hassett’s promise of "big tax refunds" is a form of direct fiscal injection.
- Impact: This fiscal pulse supports demand in 2026, countering the drag from the labor market. It explains why the Fed upgraded its GDP forecast to 2.3%.
The Tariff Inflationary Threat
The administration’s trade policy—specifically statutory tariff rates around 18%—poses the single biggest risk to the "1.6% inflation" narrative.
- UBS Analysis: Suggests that the downward trend in core inflation could be broken as tariffs feed through to retail prices. Importers facing 18% duties cannot absorb them indefinitely.
- Hassett's Counter: He argues that deregulation and energy production (deflationary) will offset the one-time price level adjustment of tariffs.
Fed Independence and the "Shadow Chair"
With Powell’s term ending in May 2026, the specter of a "Hassett Fed" looms. Hassett has pledged to respect independence, stating "the job of the Fed is to be independent". However, his close coordination with the President and explicit commentary on rate policy ("Fed's work is done") blurs the lines.
- Market Implication: If the market believes the next Chair will be more tolerant of inflation (or driven by political pressure to cut), long-term bond yields may rise (term premium) even as the Fed cuts short-term rates. This "bear steepening" would be a vote of no confidence in the Fed's long-run inflation resolve.
Market Implications and Asset Allocation Strategies
The collision of the "dirty" CPI, the Fed pivot, and the Hassett narrative creates a specific set of opportunities and risks for investors.
Equity Markets: The "Reflation" Trade
The equity market has embraced the "soft landing" view.
- Small Caps [Russell 2000]: Rose 0.6% on the news. Small caps are the primary beneficiaries of lower rates (floating debt) and domestic growth (insulation from global trade slowdowns). The Russell 2000 is trading at a historical discount to the S&P 500 and offers high beta to the Fed's cutting cycle.
- AI & Tech: The stabilization of AI stocks (Micron Technology (MU), NVIDIA Corp (NVDA)) suggests that the "AI bubble" has found a floor. Lower rates support the high valuations of long-duration tech assets.
- Strategy: Analysts recommend selling volatility (Iron Condors on S&P 500) as the VIX remains low, capitalizing on the range-bound upward drift.
Fixed Income: Curve Steepening
The bond market is pricing in a "Bull Steepener"—short-term rates falling faster than long-term rates.
- Front End (2-Year): Highly sensitive to Fed cuts. With the Fed signaling cuts to 3.25%, the 2-year yield has room to fall further toward 3.50%.
- Long End (10-Year): Sticky around 4.15%. The "Trump Premium" (inflation risk from tariffs/deficits) prevents long yields from collapsing.
- Recommendation: Fidelity suggests positioning in the "belly" (5-year) and using bond ladders. Investors should avoid excessive duration exposure (30-year bonds) due to fiscal risks.
Currency: The Dollar's Dilemma
The US Dollar (DXY) is caught between the bearish force of rate cuts and the bullish force of US exceptionalism.
- Short Term: Downward pressure as the Fed out-cuts the ECB and BoE. The DXY is testing support in the mid-98s.
- Medium Term: J.P. Morgan remains bearish on the dollar for 2026. However, if global growth falters while the US is propped up by fiscal stimulus, the dollar could stage a "safe haven" rally.
| Asset Class | Outlook | Key Driver | Recommended Strategy |
|---|---|---|---|
| US Equities (Large Cap) | Neutral/Bullish | AI Capex, Soft Landing | Quality Growth, AI ecosystem |
| US Equities (Small Cap) | Bullish | Rate Cuts, Domestic Focus | Long Russell 2000 vs. S&P 500 |
| US Treasuries (2-Year) | Bullish | Fed Easing Cycle | Long positions, locking in yields |
| US Treasuries (10-Year) | Neutral | Fiscal/Tariff Risks | Underweight duration, focus on 5-7yr |
| US Dollar (DXY) | Bearish | Narrowing Rate Differentials | Sell rallies, hedge foreign exposure |
| Commodities (Gold) | Bullish | Lower Real Rates, Central Bank Buying | Structural allocation as inflation hedge |
Table: Asset Allocation Matrix – Q1 2026
Conclusion – The Risk of the "Dirty" Pivot
The November 2025 CPI report will likely be remembered as one of the most consequential statistical artifacts of the decade. By delivering a "1.6% annualized" core inflation figure—however flawed—it provided the political and monetary license for the Federal Reserve to pivot decisively toward supporting the labor market.
Kevin Hassett’s declaration that the "price problem" is solved is a gamble. He is betting that the "dirty" data is directionally correct, even if the magnitude is exaggerated. He is betting that the rise in unemployment to 4.6% is a benign supply-side phenomenon rather than the start of a recessionary spiral. And he is betting that the productivity gains of the 2020s will mirror the 1990s, allowing for a high-growth, low-inflation equilibrium.
For investors, the immediate path of least resistance is higher equities and steeper yield curves. The "Fed Put" is back in play, backed by a White House eager to stimulate. However, the fragility of the data foundation cannot be ignored. If the "zeroed out" shelter costs snap back in Q1 2026, or if the "no hire" labor market turns into a "fire" market, the narrative will crumble.
Final Verdict: The "1.6% reality" is a useful fiction for policymakers today. Investors should trade the policy response to this fiction (buy stocks/bonds), but remain acutely aware that the underlying economic truth is likely stickier, messier, and more volatile than the headline numbers suggest.
Source
- U.S. Bureau of Labor Statistics (BLS) - Consumer Price Index November 2025 December 18, 2025
- Federal Reserve - December 2025 FOMC Statement & Projections December 10, 2025
- Federal Reserve - Summary of Economic Projections (SEP) December 10, 2025
- The White House - Economic Impact of Extending TCJA Provisions March 2025
- The White House - Sunday Shows: President Trump’s America First Trade Policies in Action April 2025
- U.S. Senate Joint Economic Committee - Inflation Update November 2025 Data
- Bank of England - Exchange of letters regarding CPI Inflation December 18, 2025
- Federal Reserve Bank of Cleveland - Inflation Nowcasting December 18, 2025
- J.P. Morgan Asset Management - 2026 Year-Ahead Investment Outlook December 2025
- Goldman Sachs - The Outlook for Fed Rate Cuts in 2026 Post-CPI Analysis
- Fidelity - The Fed Meeting December 2025
- Citigroup - Recession vs Soft Landing Analysis 2025
- iShares (BlackRock) - Fed outlook 2026 interest rate forecast December 2025
- UBS - Quick takes on the second Trump administration December 2, 2025
- Zillow Research - CPI Forecast November 2025 Data
- The Conference Board - CPI Analysis December 2025
- BMO Economics - Economic Analysis December 2025
- EY - CPI Report Analysis December 2025
- First Trust Portfolios - The Consumer Price Index (CPI) rose 0.2% December 18, 2025
- State Street Global Advisors - ETF Market Outlook 2025
- Capital Group - U.S. economy poised for soft landing? August 2024 (Historical Context)