Will core PCE YoY fall below 2.5% by August 2026?
The Condition
Fed cuts ≥25bp at May 6, 2026 FOMC meeting
Our Ensemble Estimates
Given Fed cuts ≥25bp: Will core PCE YoY fall below 2.5% by August 2026?
Given Fed holds: Will core PCE YoY fall below 2.5% by August 2026?
Causal Effect
A surprise cut weakens the dollar and adds demand stimulus, modestly reducing the already-low probability of inflation convergence — but the effect is small because dual supply shocks dominate regardless of policy rate
Why This Matters
Tests whether inflation convergence can complete under easing conditions. Core PCE is currently stuck above 2.5% with the regime reclassified from MODERATING to PERSISTENT. Dual supply shocks (tariffs + Iran oil) dominate the inflation driver composition. A May cut would signal the Fed prioritizes employment over inflation — potentially weakening the dollar further (compounding import inflation) and adding demand stimulus. The March SEP revised core PCE to 2.7% for 2026 and pushed convergence to 2% out to 2028. 5Y TIPS breakevens at 2.63% suggest market expectations are drifting.
Resolution Criteria
BEA Personal Income and Outlays report for July 2026 data (released late August 2026) shows core PCE price index YoY change below 2.50%
Source Analysis
Core PCE convergence pushed to 2028, 3 of 7 monitoring triggers tripped, MoM annualized at 4.5%