US personal consumption expenditures (PCE) price index inflation rose 2.9% year over year in December. This was above the 2.8% forecast.
The reading was 0.1 percentage points higher than expected. This suggests inflation was a bit hotter than markets predicted.
Implications For Fed Policy
Because December 2025 inflation came in higher than expected, we need to rethink the Federal Reserve’s likely path. The surprise increase in the PCE index suggests inflation is more persistent than many hoped. As a result, an early-2026 interest rate cut now looks less likely.
This change is showing up in interest rate futures. Futures now point to a much lower chance of a March cut than they did a few weeks ago. For example, the market is pricing in less than a 40% chance of a cut at the Fed’s March 2026 meeting, down from over 75% at the start of the year. This shift supports the idea that rates may stay “higher for longer.”
This outlook also supports using derivatives to hedge against, or potentially benefit from, higher market volatility. The CBOE Volatility Index (VIX) has already risen to around 17 from its late-2025 lows, and it could move higher. We are considering put spreads on major indexes like the SPX to help protect against a possible equity decline driven by still-high interest rates.
In fixed income, the data suggests U.S. Treasury yields may keep rising as expectations for rate cuts move further out. The 10-year Treasury yield has already climbed back above 4.15% in February 2026 after strong economic data. Traders may consider approaches that can benefit from falling bond prices, such as shorting Treasury futures.
This backdrop is also supporting the U.S. dollar. A more patient Fed stands in contrast to other central banks that may be closer to cutting rates. The U.S. Dollar Index (DXY) has gained over 2% since the start of the year.
Positioning For Dollar Strength
We see call options on the DXY, or on related currency ETFs, as a direct way to gain exposure to continued dollar strength in the coming weeks.
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