Fed's Assessment of Contained Inflation and Monetary Policy Trajectory for H2 2026

Now I have comprehensive information to provide a thorough analysis. Let me synthesize these findings.

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Based on the current economic landscape, Fed official statements, and institutional analysis, the Federal Reserve’s characterization of inflation as “contained” or near-target presents a nuanced backdrop for monetary policy decisions in the second half of 2026. The following analysis examines how this assessment may shape the Fed’s trajectory.

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Fed Governor Stephen Milan has articulated that

, arguing that headline measures overstate true inflationary pressures due to statistical distortions, particularly in housing costs (Owners’ Equivalent Rent) and portfolio-fee components [1]. According to Milan, excluding these distortions, underlying inflation is estimated at —effectively within the noise range of the Fed’s 2% objective [1].

However, the official Fed position, as reflected in the

, acknowledges that headline progress toward the 2% target has “stalled.” Core PCE inflation currently hovers around based on late January 2026 nowcasts [2][3]. This divergence between Milan’s “underlying” view and the official stance creates an important policy tension.

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The Fed’s January 2026 assessment explicitly recognizes that

, with pass-through effects accelerating in early 2026 as inventories deplete [3]. New York Fed President John C. Williams noted that tariffs are “driving much of the current 2.75% rate” [3].

This creates a bifurcated narrative:

• Transitory view
  : Tariff effects are characterized as a “one-time price increase” that will peak around mid-2026 and then dissipate [3]
• Structural risk
  : Combined with fiscal deficits potentially exceeding 7% of GDP, there remains a risk of inflation surging above 4% by year-end [3]

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The January 2026 FOMC voted

, with dissenters Governors Stephen Milan and Christopher Waller favoring another 25-basis-point cut [4]. This decision reflects what UBS characterizes as a approach—the Fed is waiting for “unequivocal evidence” that inflation is sustainably anchored at 2% before proceeding with further easing [4][5].

Key elements of this stance include:

• Rate trajectory likely a
  “wait-and-see” period
  extending through spring and potentially into summer 2026
• No immediate further cuts contingent on inflation remaining above 2%
• Rate hikes deemed unlikely until late 2026 or beyond [4]

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The December 2025 Summary of Economic Projections (SEP) provides the following framework:

Indicator	2026 Projection
Headline PCE Inflation	2.3% by year-end 2026, declining toward 2% by end of 2027
Fed Funds Rate	Median projection: one 25-basis-point cut in 2026; second cut in 2027
Real GDP Growth	Above-trend pace (2.5-2.8%)
Unemployment	Rising toward 4.7-4.8%

However,

from the official dot plot. UBS projects a in 2026, with:

• First cut
  : June 2026 (to 3.00-3.25%)
• Second cut
  : September 2026 [5]

This suggests the

will be the primary window for monetary easing, as growth slows and goods inflation eases [5].

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The Fed’s assessment of contained inflation could influence policy in H2 2026 through several channels:

• If inflation data in Q1-Q2 2026 confirms the “contained” narrative, the Fed may feel comfortable proceeding with
  one or two rate cuts
  in H2 2026
• A June cut would likely be followed by a September cut, bringing the policy rate to approximately
  3.00-3.25%

• The Fed’s confidence in “underlying” inflation being near target could support a
  more aggressive easing path
  than the official dot plot suggests
• However, tariff uncertainties and fiscal pressures may temper this enthusiasm

• The Fed has emphasized a
  patient, data-dependent stance
  —H2 2026 decisions will heavily depend on:
  • Monthly PCE inflation readings
  • Labor market conditions (unemployment trajectory)
  • Tariff pass-through effects
  • Housing inflation normalization

• Fed Chair Powell’s term expires in May 2026, creating potential policy uncertainty [1]
• If Kevin Warsh or another chair is nominated, policy direction could shift—though UBS suggests this
  does not alter the near-term outlook
  [5]

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Scenario	Inflation Path	Policy Response
Base Case	Inflation falls to 2.3-2.5%, tariff effects fade	One or two 25bp cuts in H2 2026
Bullish	Inflation falls below 2.3% consistently	Earlier/more aggressive cuts possible
Bearish	Inflation remains elevated above 2.75-3%	Rates held steady through H2 2026
Risk Scenario	Tariffs + fiscal stimulus push inflation above 4%	Potential rate hike considered

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Current market indices reflect relative stability amid Fed uncertainty:

• S&P 500
  : Virtually flat (+0.42%) over the past 30 trading days
• NASDAQ
  : Down 1.72%, reflecting tech sector sensitivity to rates
• Dow Jones
  : Up 2.92%, benefiting from value/industrial exposure
• Russell 2000
  : Strong performer (+5.59%), potentially signaling optimism about growth [6]

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The Fed’s assessment of contained inflation, as articulated by Governor Milan, supports a

, contingent on confirmation that underlying price pressures are indeed near the 2% target. However, the official FOMC stance remains cautious, emphasizing “strategic patience” until inflation progress is more firmly established.

1. The Fed is likely to maintain its
   3.5-3.75% policy rate through mid-2026
2. One or two 25-basis-point cuts
   are probable in H2 2026, most likely in
   June and September
3. The
   pace and timing
   of easing will depend heavily on monthly inflation data, labor market conditions, and tariff effects
4. Housing/shelter inflation normalization could provide the “cover” the Fed needs to declare victory on inflation

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[1] Futunn News - “Federal Reserve Governor Milan reiterated the call for faster interest rate cuts” (https://news.futunn.com/en/post/66223546/federal-reserve-governor-milan-reiterated-the-call-for-faster-interest)

[2] Chronicle Journal - “The Federal Reserve Signals ‘Strategic Patience’ with Rate Hold” (http://markets.chroniclejournal.com/chroniclejournal/article/marketminute-2026-2-6-the-federal-reserve-signals-strategic-patience-with-rate-hold-market-eyes-shifting-easing-cycle)

[3] Roic AI News - “Fed Signals Inflation Persists Above Target, Driven by Tariff Effects” (https://www.roic.ai/news/fed-signals-inflation-persists-above-target-driven-by-tariff-effects-01-28-2026)

[4] FNB Alaska - “FedViews - January 2026” (https://www.fnbalaska.com/about/news-events/fedviews-january-2026/)

[5] UBS - “What does Fed policy mean for investors?” (https://www.ubs.com/us/en/wealth-management/insights/market-news/article.3075363.html)

[6] Ginlix API Data - Market Indices Performance (30 trading days ending February 9, 2026)