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The Fed's preferred inflation measure runs hot
Core PCE (Personal Consumption Expenditures excluding food and energy) is the Fed's preferred inflation measure. Above 3% puts it well above the 2% target and ensures the Fed maintains restrictive policy until it declines.
Editorial commentary written by ALAN analysts. Figures cited below are analyst-authored context — they are not derived from the chart above and may reflect different windows or sources.
The Fed's dual mandate targets 2% PCE inflation. At 3%+, rate cuts are off the table regardless of labor market conditions. This removes a potential equity catalyst.
PCE uses a broader consumption basket and allows for substitution effects. When CPI is at 4%, PCE is typically at 3.5%. The Fed cares about PCE, not CPI.
Core PCE above 3% is almost always driven by services (housing, healthcare, insurance) which are slow to adjust. Goods disinflation helps but cannot single-handedly bring core PCE to target.
With the Fed's preferred gauge this far above target, rate cuts are effectively off the table — so audit the portfolio for positions whose thesis quietly depends on cheaper money, such as leveraged holdings or speculative growth. Meanwhile, restrictive policy means idle cash finally earns a meaningful yield: review where yours is parked and what it is being paid.