“Near 2%—If You Ignore Tariffs”: Jan 16 Release Collides with Rising Pass‑Through

PRESS RELEASE SUMMARY

On 2026-01-16, the official press release leaned hard into a benign inflation story: December core PCE is “likely” 2.9% y/y, and “close to 2 percent” once tariff effects are removed. It framed firms as “less able to pass through higher costs,” flagged “growing labor market fragility,” and justified a series of rate cuts—three 25 bp moves in September, October, and December—bringing the target range to 3.50%–3.75%. The speech nodded to a “significant” Q3 growth pickup, a likely Q4 slowdown (shutdown and softer retail), and argued that productivity tailwinds support easier policy.

Here’s what the data reveals:
- Inflation is recast as almost at target “ex tariffs,” despite a headline core PCE at 2.9% y/y.
- Firms are described as facing weaker pricing power, while rates have been cut by a cumulative 75 bp, acknowledging rising downside risks to employment.
- Labor stress points include 4.4% unemployment in December, private job gains averaging about 30,000 per month in Q4, more multiple job holders, and increased part-time for economic reasons.
- The speech highlights “recent firming” in house prices and sales and claims consumption softened through November, even as higher-income holiday spending reportedly firmed late in the quarter.
- The narrative reprises an “inflation-near-2% without tariffs” lens used since October 2025.

The Inflation Lens: Ex‑Tariff Serenity vs On‑the‑Ground Pressures

The release presents a tidy inflation story once tariffs are stripped out. The Beige Book does not. Across Districts, contacts report ongoing, broad-based cost pressures—tariffs front and center—alongside energy and insurance. Critically, pass-through is picking up as pre‑tariff inventories run down. That is the opposite of fading tariff effects.

• The “near-2%” framing relies on excluding tariffs—just as it did in October 2025—while the January Beige Book emphasizes that tariff-related pressures are active now and increasingly passed through.

• Price growth is described as “moderate” in most Districts, with only “some moderation” ahead and prices “expected to remain elevated.” That is not the stuff of imminent 2% equilibrium.

Pass‑Through: Up, Not Down

The speech claims firms are “less able” to pass through higher costs, pointing to weak demand. The Beige Book, however, records firms beginning to pass tariff costs on as cheap inventory disappears. Add rising energy and insurance, and the picture is margin defense, not margin surrender.

• If pass-through is rising while the policy message leans on a tariff-adjusted inflation measure, investors should expect more stickiness in core. The risk is a slower descent in services disinflation than the speech implies.

Labor: Fragile in the Numbers, Flat on the Ground

The release leans into visible pressure points: unemployment at 4.4%, Q4 private payroll gains near 30k/month, and more multiple job holders and involuntary part-time. That reads fragile. The Beige Book’s temperature check is cooler: employment was mostly unchanged in 8 of 12 Districts, with wage growth stable to modest and hiring primarily for backfilling—not expansion, but not falling off a cliff either.

• The Committee’s policy pivot—three cuts to 3.50%–3.75%—fits Chair Powell’s October 2025 warning about rising employment downside risks. But ground-level conditions today look softening, not collapsing.

• Regional nuance matters: New York shows modest declines; Minneapolis reports employment softening; other Districts are flat. The national fragility narrative may be running ahead of the median reality.

Consumers and Housing: Selective Sunshine, Selective Clouds

The speech spotlights softer retail through November. True—but the Beige Book notes slight-to-modest consumer spending growth this cycle, with stronger holiday activity among higher-income consumers. That late-quarter lift tempers the “weak demand” premise.

On housing, the release notes “recent firming” in prices and sales. It exists in spots. But the Beige Book reports broad softness in residential sales, construction, and lending across most Districts, with isolated improvements (e.g., parts of the Sixth District).

• The consumer is bifurcated: higher-income households carried holiday momentum; lower-income segments remain stretched. Retail’s softness is present but not universal.

• Housing is uneven. Pointing to firming in select regions while most Districts soften risks misreading the breadth of the slowdown.

Productivity as Policy Alibi—Too Soon

The release leans on elevated productivity growth—attributed to new technologies—to support easing. Beige Book contacts indeed report experimentation, but near-term employment effects are limited, with more substantial impacts pushed into coming years. That makes productivity a weak near-term disinflation engine.

• If productivity’s lift is backloaded, the near-term inflation path hinges more on demand normalization and cost pressures (tariffs, energy, insurance) than on efficiency miracles.

Speech vs. Beige Book: What the Jan 16 Documents Actually Say

What This Means for Markets

The policy story is dovish; the price story is sticky. That mix argues for asymmetry in rates, dispersion in equities, and vigilance on margins.

• Rates: With the target range at 3.50%–3.75%, the speech’s emphasis on near-target inflation raises market hopes for more easing. But active tariff pass-through and non-tariff cost pressure argue against a straight-line glide to 2%. Position for a bumpier disinflation path:

• Credit: If margins hinge on pass-through, companies with pricing power should outperform. Be selective:

• Equities: Expect dispersion:

• FX/Commodities: Tariff-cost pass-through risks imported inflation persistence.

• Regional banks and lenders: Beige Book reports softer residential lending in most Districts. Keep exposure tight; favor franchises with diversified fee income and conservative commercial real estate books.

Looking Ahead: The Numbers to Test the Narrative

• December PCE: Does core stick near 2.9% y/y, and do services stay firm?

• Corporate earnings calls: Watch margin commentary around tariffs, energy, and insurance—evidence of pass-through (or the lack of it) will be explicit.

• Beige Book updates: Track whether “mostly unchanged” employment turns into regional divergence or broad deterioration.

• Housing data: Validate whether isolated firming spreads or broad softness persists into spring selling season.

• Inventory dynamics: The timing of pre‑tariff inventory exhaustion is the fulcrum for 1H pass-through intensity.

The policy arc has evolved—from “not in a hurry” (February 2025) to proactive easing by October and December. The messaging thread—“inflation near 2% if you strip tariffs”—has persisted even as tariff pass-through is accelerating now. That mismatch matters for timing and magnitude of further cuts.

The investor takeaway: the headlines say “almost there.” The footnotes say “not yet.”

Actionable positioning:
- Rates: Maintain duration neutrality to slight underweight; add breakeven exposure in the 2–5 year window as a hedge.
- Credit: Tilt to quality with demonstrable pricing power; avoid margin-weak cyclicals facing energy/insurance pressure.
- Equities: Barbell defensives with select premium consumer and asset-light services; be cautious on housing-linked cyclicals until District-level softness abates.
- Risk management: Expect headline-friendly inflation prints to clash with Beige Book realities. Use optionality around key releases to capture volatility without overcommitting directional bets.

Policy is easing. Prices are not capitulating. In this phase, the edge goes to investors who read past the “ex‑tariff” headline and underwrite margins where the pass-through actually happens.