PCE Inflation Stays Above 2% for Fifth-and-a-Half Year… 10-Year Treasury Yield Tops 5%
The yield on the 10-year U.S. Treasury bond broke above 5% intraday on the 14th (local time), the first time since October 2023. A sharp surge in international oil prices and mounting inflation pressures were behind the move.
The year-on-year rise in the personal consumption expenditures (PCE) price index — the Federal Reserve's key inflation gauge — has exceeded 2% since March 2021. The same holds for both headline inflation and core inflation, which strips out volatile energy and food prices. The inflation overshoot, now stretching past five and a half years, was ignited by the pandemic and accelerated by Russia's war in Ukraine in 2022. U.S. President Donald Trump's tariff war and the Iran war that broke out this past February have pushed prices back up into the 3% range.
The Fed briefly brought inflation down to the mid-to-high 2% range through aggressive tightening in 2022–23. But after extinguishing the immediate inflation fire, it repeatedly pivoted back to a dovish stance, reacting sensitively to signs of labor market cooling. Without achieving its 2% target, the Fed cut rates at all three of its meetings in the late stretches of 2024 and 2025. Long-term Treasury yields rose in both years from September, when the Fed began cutting, through year-end, while PCE inflation stalled in the mid-to-high 2% range and ultimately turned upward again.
Fed Chair Kevin Warsh, at his first press conference following the June FOMC meeting after taking office, said: "We recognize that inflation has run above the 2% target the Fed has long articulated for more than five years," adding that "the recent past need not be a prologue to the future." Yet at the July FOMC, while showing the same concern, he took a lukewarm stance on rate hikes, and long-term yields surged afterward.
Speaking at last month's Jackson Hole symposium, Warsh stressed: "Responsibility for 65 months of elevated inflation rests entirely with the central bank — and rightly so." He added: "We must be confident that underlying inflation is moving clearly, and at a sufficient pace, toward our target." Hawks within the Fed, including Cleveland Fed President Beth Hammack, cite the prolonged overshoot as grounds for rate hikes.
