The Fed's PCE Dilemma: Inflation Cooldown or Persistent Drag?

The September 2025 FOMC meeting marked a shift toward easing, with the federal funds rate cut to 4.00%–4.25% amid a slowing labor market and revised growth forecasts. While the median core PCE inflation projection for 2025 was maintained at 3.1%, the Fed's Summary of Economic Projections signaled optimism about a decline to 2.6% in 2026 and 2.0% by 2028. This trajectory hinges on the assumption that tariff-driven inflation will prove transitory, a claim supported by the New York Fed's DSGE model, which projects core PCE inflation at 2.8% for 2025 and 1.8% for 2026.

The 10-year TIPS breakeven rate remained at 2.23% as of November 2025, reflecting a disconnect between Fed projections and investor sentiment. This stability contrasts with the Fed's acknowledgment that inflation risks are "more balanced" but still elevated.