The Federal Reserve has committed an error of historic proportions. Between August 2023 and January 2026, the FOMC executed 175 basis points of rate cuts, driving the funds rate from 5.50% to 3.75% over two years, while core inflation was elevated. And now it is accelerating, not decelerating. This is not what policy makers expected; it is policy easing into a reflationary storm.
Core PCE's three-month moving average annualized has surged to 4.41%, up sharply from 3.27% just months prior (chart below) Services inflation, at 4.44% and climbing, has proven stubbornly resistant as well. The Fed cut into this. Goods disinflation provided political cover, but that was always transitory base effects and supply chain normalization, not policy success. With crude oil now breaking higher and the dollar weakening, goods prices are set to flip from tailwind to headwind. The Fed eased before the hard part was finished.