Fed's Anchor Holds: Stable Expectations Enable Growth Policy

The Federal Reserve's recent stance points firmly toward growth-friendly policy, underpinned by fresh data showing inflation pressures are largely temporary. Federal Reserve Governor Christopher Waller's November assessment is particularly telling: excluding the distorting effect of tariffs, inflation has returned to the Fed's coveted 2% target, with market-based indicators like the 10-year TIPS breakeven rate signaling expectations remain firmly anchored. While headline PCE inflation hit 2.7% in August and core PCE stood at 2.9%, Waller attributes these overshoots squarely to the recent tariff shock rather than underlying economic momentum. This view aligns with the Philadelphia Federal Reserve's Survey of Professional Forecasters (SPF) for Q4 2025, which shows core PCE inflation probabilities for 2025-2026 settling in the 2.5% to 3.4% range. Critically, the SPF also confirms that long-term inflation expectations – measured as the 10-year average CPI – remain steady at 2.38%, demonstrating that forecasters see the current spike as fleeting. With the Fed's primary concern being persistent inflation, not temporary tariff-induced blips, and market sentiment well-controlled, policymakers appear confident that inflation will revert to target as tariff effects fade, clearing the path for further monetary easing.

Markets remain focused on the delicate balance between persistent price pressures and the prospect of a controlled cooling in inflation. A primary way to gauge whether that delicate equilibrium holds is by examining how financial markets themselves price in the future path of consumer prices. The 10-year Treasury Inflation-Protected Securities (TIPS) breakeven rate, derived from the gap between nominal Treasury yields and TIPS yields, stands as a key market-based gauge of average inflation expectations over the next decade, as tracked by the U.S. Treasury and compiled on platforms like FRED. While the precise November 2025 reading isn't stated here, the methodology underscores its role as a barometer of collective market sentiment on long-term price trends. Complementing this, the Philadelphia Federal Reserve's Survey of Professional Forecasters (SPF) for Q4 2025 offers a different, valuable perspective from expert economists. Their data shows forecasters projecting a 10-year average CPI inflation rate of 2.38% for 2025-2034, a slight uptick from 2.31% in the prior survey but firmly within the range historically associated with moderately anchored expectations. This alignment between the market's long-term gauge and the consensus professional view suggests stability in the foundational belief that inflation will remain contained over the extended horizon, even as near-term forecasts show modest adjustments upward for 2025 and 2026. Of course, both measures have limitations; the breakeven rate can be influenced by supply and demand imbalances in the TIPS market itself, while the SPF relies on the evolving judgments of a finite group of forecasters. Nevertheless, the convergence of these two distinct signals provides a robust foundation for viewing current long-term inflation expectations as firmly anchored.

Despite growing economic uncertainty in late 2025, Americans aren't abandoning long-term financial stability just yet. New University of Michigan data shows year-ahead inflation expectations climbing to 4.7% in November, up slightly from October's 4.6%, while long-run inflation outlooks dropped to 3.6% from 3.9%-revealing a disconnect between immediate anxiety and enduring confidence. Meanwhile, consumer sentiment slumped 6.2% month-over-month, driven largely by fears over a looming federal government shutdown rather than inflation concerns themselves. This divergence suggests households are separating temporary political turbulence from their core financial planning.

The Federal Reserve stands at a critical inflection point where inflation expectations remain sufficiently anchored to allow policymakers to prioritize growth without triggering unwanted market reactions. Christopher Waller's November 2025 remarks underscore this balance: despite August 2025 PCE inflation readings of 2.7% and core PCE at 2.9%, both measures are now near the Fed's 2% target when excluding temporary tariff distortions, while 10-year TIPS breakeven rates reflect well-anchored market expectations. This stability creates breathing room for further rate cuts as Waller anticipates inflation normalizing once tariff pressures fade, enabling employment-focused easing without risking a spiral in price expectations according to the Federal Reserve's review.

The Philadelphia Fed's Q4 2025 survey data further reinforces this foundation, showing long-term (2025-2034) average inflation projections unchanged at 2.38% despite near-term volatility, signaling forecasters' confidence in the central bank's credibility. While short-term forecasts nudged higher-3.1% annualized CPI for Q4 2025 and 2.8% for 2026-these adjustments remain within the Fed's tolerance band, and core PCE probability ranges (2.5-3.4%) suggest manageable uncertainty rather than systemic risk as reported in the SPF Q4 2025 data.

Even as November 2025 University of Michigan data revealed a sharp 6.2% month-over-month plunge in consumer sentiment, the decline appears politically motivated rather than economically driven, with respondents citing government shutdown concerns rather than inflation or employment fears. This distinction preserves policy flexibility, as falling long-run inflation expectations to 3.6% still reside well above the 2% target and reflect transient uncertainty rather than permanent pessimism according to University of Michigan research. Together, these signals confirm that anchored expectations provide the cushion needed for growth-oriented monetary policy without compromising the Fed's inflation mandate.