Consumer price growth accelerated by slightly less than expected in the United States last month, helping lower short-term yields and putting downward pressure on the dollar. According to data published by the Bureau of Labor Statistics this morning, the core consumer price index—with highly-volatile food and energy prices excluded—rose 0.2 percent in December from the prior month, and was up 2.6 percent over the same period a year prior. This narrowly missed consensus estimates among economists polled by the major data providers ahead of the release. On a headline all-items basis, prices climbed 0.3 percent month-over-month, and were up 2.7 percent year-over-year, matching the pace set a month earlier. Evidence of tariff-induced price pressures remained difficult to see, with the bulk of the headline gain coming from increases in the shelter, food, and recreation categories, offset by modest declines in auto and goods prices.

Treasury yields are coming down on the policy-sensitive front end of the curve, equity futures are climbing off their lows, and the dollar is retreating against its major rivals as traders move to price in more monetary easing in the back half of the year. Odds on a rate cut at this month’s Fed meeting remain unchanged at less than 5 percent, while the likelihood of a move in June is inching closer to coin-toss levels.

The release comes after New York Fed President John Williams expressed confidence in the US economy’s underpinnings in an appearance at a Council for Foreign Relations event in New York. Williams said monetary policy is currently “well positioned” to keep labour markets and prices stable, suggesting that the unemployment rate could soon equalise near current levels while growth accelerates and inflation eases from an early-year peak. In defending the Fed against the weekend’s assault from the Trump administration, Williams said increasing political oversight of the institution risked generating “very unfortunate economic outcomes”—something backed up through the experience of hundreds of central banks and dozens of academic studies—and called Chair Powell a man of “impeccable integrity” who has demonstrated strong leadership amid challenging circumstances.

Fears over the Fed’s independence have eased, reducing pressure on the dollar and the Treasury yield curve. News that the Department of Justice had opened a criminal investigation into Jerome Powell over the central bank’s headquarters renovation drew pushback from senior Republicans yesterday, with Senate Majority Leader John Thune saying that the Fed’s role in setting monetary policy must be preserved free from political interference, while Thom Tillis, a member of the Senate Banking Committee, warned he would oppose confirmation of any Fed nominee—including the next chair—until the matter is resolved.

Perhaps more importantly for markets, Bloomberg reported last night that Jeanine Pirro, former Fox News host and current US attorney for the District of Columbia, ordered the grand jury subpoenas without seeking approval from senior administration officials, suggesting political backing for the investigation may be more limited than had been feared. President Trump denied prior knowledge of the action in an interview with NBC News on Sunday.

Counter to the administration’s intent, the episode may have set the stage for more hawkish monetary policy outcomes ahead. If our read on Powell’s personality is correct, he is now more likely to stay on as a Fed governor after his term as chair ends in May, denying Trump the opportunity to put another avowed dove on the Federal Open Market Committee. Prediction markets currently favour Kevin Hassett or Kevin Warsh as his successor, but both are seen as political creatures and could face difficult confirmation processes—particularly if public scrutiny remains as intense as it is today—as well as limits on their influence once in position. More clearly-independent candidates, such as Governor Christopher Waller, may see their prospects improve. Inflation breakevens could also stay elevated as long as threats to the Fed’s independence remain credible, forcing policymakers to tread cautiously and reducing the likelihood that rates are pushed into overly-accommodative territory.

In our view, a hawkish repricing in US growth and monetary policy expectations should resume after this brief interruption, with positive data surprises helping boost the dollar against its rivals—unless, of course, another round of political disruption upsets the apple cart.