Will 3% Inflation Become the Fed’s New Target? Not Likely

No, the Fed can’t just “pick 3%” and call it a day

No, the Fed can’t just “pick 3%” and call it a day. I get why that idea keeps popping up, 3% feels close enough to what we’ve been living with, and wouldn’t it make everything cheaper-feeling without more rate pain? But that’s not how this works. The Fed’s inflation goal isn’t a dimmer switch; it’s the anchor for how households, CFOs, and bond desks set prices, wages, and borrowing costs. Since 2012, the formal target has been 2% PCE inflation. Changing that wouldn’t be a tweak. It would be a regime shift with dollar signs attached, mortgages, wage bargaining, asset valuations, all of it.

And to head off the rumor mill: Fed officials have said it again and again across 2024 and 2025, they’re not considering changing the 2% goal. Chair Powell and others have been explicit that 2% is the objective. Markets hear that. Why? Because credibility is a financial asset. If you move the target when it’s hard to hit, you risk un-anchoring expectations. In plain English: investors and businesses start assuming higher inflation later, and long-term interest rates drift up.

Here’s the part that bites in the real world. Long-run inflation expectations feed straight into bond yields. If the market shifts from assuming 2% to assuming 3% inflation over time, nominal yields tend to reflect that, often close to one-for-one over the long run. The 10-year Treasury is the benchmark for almost everything. And the 30-year mortgage rate usually sits about 150-200 basis points above that. So a “mere” 1 percentage point nudge in the anchor could show up as something like a 0.5-1.0 percentage point higher mortgage rate over time, depending on risk premia. Not instant. But persistent.

That flows through. Mortgages are roughly two-thirds of U.S. household debt by balance, so even small rate changes have big budget effects. Wage setters start asking for higher cost-of-living bumps. Equity valuations? Higher discount rates press multiples lower unless earnings re-accelerate. I almost said “term premium” there, sorry, jargon. Think of it as the extra cushion investors demand when they’re less sure inflation will behave.

What you’ll get from this piece: a quick walk-through of why the 2% target exists, why moving it to 3% isn’t painless, and how that decision would ripple through your mortgage quote, your paycheck, and your portfolio. We’ll also lay out what the Fed has actually said this year and what markets are pricing right now, without the Twitter drama. And, small personal note, earlier this year I priced a refi for a relative; a 0.375% rate shift changed the math on their monthly payment more than any coupon-clipping could. It’s not academic when it hits the escrow account.

• History, fast: 2% PCE target since 2012; not a casual line in the sand.
• Policy stance in 2024-2025: Officials have repeatedly rejected changing the target.
• Money impact: Shift the anchor, and you likely lift long-term rates, mortgage costs, and the hurdle rate for stocks.

“Our inflation goal is 2 percent.” That line isn’t decoration, it’s the anchor. Moving it is a credibility decision with real cash-flow consequences.

What “3% inflation” actually means for your money

Here’s the gut-check part. A steady 3% inflation rate sounds tame compared with the spikes we lived through in 2022, but compounding is sneaky. Pure math: at 3% a year, your purchasing power falls about 26% over 10 years and roughly 45% over 20. Said differently, $100 today buys ~$74 in a decade and about ~$55 in twenty years if your income or yield doesn’t keep pace. I know that feels abstract; it isn’t when you price daycare, insurance deductibles, or a roof replacement that suddenly costs “only” 3% more every year, which stacks up fast when you’re not looking.

And here’s where the rubber meets the budget. Plenty of real-world cash flows don’t adjust cleanly at 3%: wages, annuities, leases, retainer contracts, even maintenance agreements. Many salary bands update annually and only partly, merit raises have to absorb both performance and inflation, which means if the cost-of-living line quietly shifts higher and stays there, more risk lands on households and small businesses. Commercial leases often have fixed 2-3% escalators or caps; sounds fine when inflation runs at 2, not so fine if it runs hotter for years. Annuities without inflation riders are the poster child here: the nominal payment is the same, but the groceries aren’t. I’ve watched clients feel this, year 1 is fine, year 7 is tight, year 12 they’re cutting travel to pay for utilities.

Taxes add a bit of sand in the gears. Federal tax brackets are indexed using chained CPI-U (since 2018 under the Tax Cuts and Jobs Act), not the standard CPI-U most headlines cite. Chained CPI typically runs a touch lower over time because it accounts for substitution. Translation: in a higher steady inflation world, bracket thresholds creep up more slowly than some prices, so “bracket creep” risk rises, your nominal raise can push you into higher marginal rates even if your real income didn’t truly rise. Benefits and premiums also move on lags and with oddities: Social Security COLA uses CPI-W measured from Q3 to Q3, Medicare premiums follow their own formulas, and employer health plans reprice annually with carrier-specific medical trend. None of this updates in perfect sync with your grocery bill, which is why the mismatch stings.

There’s also an alphabet soup mismatch that matters for planning. The Fed targets PCE inflation (broader basket, weights adjust dynamically); many contracts, paychecks, and rent escalators reference CPI. Historically, PCE runs a bit lower on average than CPI, roughly a couple tenths of a percentage point over long stretches. If policy anchors the economy to PCE and your paycheck tracks CPI, or vice versa, you can end up with a spread that either quietly helps or quietly hurts. I’ve seen landlords push for CPI-U clauses while finance teams budget to PCE; small difference year one, not small by year ten.

What to do with that? A few grounding numbers help. If you target a real return, you need a nominal hurdle that clears both inflation and taxes. At 3% inflation and, say, a 22% marginal tax rate, a bond fund yielding 4% isn’t delivering 1% real after-tax; it’s closer to zero after fees. That’s not a forecast, just arithmetic. On the liability side, a 20-year fixed payment, tuition plan, equipment lease, alimony, gains you real relief in a 3% world only if your income adjusts faster than the price level, otherwise you’re just treading water while other line items float up.

I may be oversimplifying a hair because household baskets differ (kids, no kids, urban, rural), and PCE vs CPI quirks get wonky fast. But the core point lands: a stable 3% skews planning toward assets and contracts that either float with inflation or have room to reprice, and it argues for reviewing anything “fixed” in nominal terms, salaries, long leases, pensions without COLAs, because the math compounds whether we notice or not.

3% isn’t scary in a headline; it’s relentless in a spreadsheet.

• Rule-of-thumb math: Purchasing power after 10 years ≈ 1/(1.03^10) ≈ 74%; after 20 years ≈ 55%.
• Indexing reality: Fed targets PCE; many paychecks/leases reference CPI. Over time CPI tends to run a bit hotter than PCE.
• Taxes and benefits: Brackets use chained CPI-U; Social Security uses CPI-W with a lag; insurance premiums reprice annually with medical trend.
• Planning move: Stress-test fixed incomes and long-dated liabilities at a steady 3% inflation path; adjust savings rates and COLA assumptions, not just return assumptions.

Where inflation stands as we sit in 2025

Quick reality check: inflation came off the boil after 2022, but it didn’t coast neatly to 2%. It jogged, stopped for water, jogged again. The official target is still 2% on PCE, no change there this year, and the data have mostly lived in the 2-3% zip code, sometimes a touch above. That’s why you’re hearing the “is 3% the new normal?” question again. It’s not the Fed’s line; it’s the market and CFOs sanity-checking plans.

Let’s ground it. Headline PCE inflation peaked at 7.1% year-over-year in June 2022 (BEA). Core PCE topped out around 5.4% YoY in February 2022. Fast forward: through most of 2024, 12‑month headline PCE ran roughly 2.5-3.0%, and core PCE hovered ~2.8-3.5% depending on the month (Fed/BEA monthly releases). Earlier this year, readings again clustered in the high‑2s. Not scary on TV; consequential in models.

CPI, as always, is the noisy cousin. Historically it runs hotter than PCE by about 0.2-0.4 percentage points on average, and that spread isn’t a trivia item, it matters. COLAs, many leases, and assorted vendor contracts reference CPI (sometimes CPI-U, sometimes CPI-W), not PCE. If PCE is at 2.7% and CPI is at, say, 3.1%, you feel the difference in wage adjustments and rent escalators. I’ve sat in more than one budget meeting where that 30 bps spread was the entire margin debate.

Markets haven’t lost the plot. The longer-run gauge that pros watch, 5y5y breakeven inflation, has spent most of the 2019-2024 window anchored around ~2.0-2.5% (Fed Board data and TIPS pricing). Yes, it wobbled during the 2022 shock, but it never unmoored. That anchor is why term premiums and mortgage rates didn’t go completely off the rails for a sustained period. This year, breakevens are still signaling a long-run number near 2-2.3%, give or take a few basis points on any headline day.

Policy-wise, the Fed’s communication in 2025 remains plain: get inflation back to 2% on PCE; don’t redefine success midstream. They’ve said as much at every presser. Rate cuts and balance-sheet runoff are calibrated to the path of core inflation and labor rebalancing, not to crown 3% as victory. Could they tolerate 2-point-something for longer? Sure. Call it patience, not a new target.

Here’s the gray area (where real decisions live): the path is uneven. Goods disinflation did a lot of the heavy lifting in 2023-2024. Services, especially shelter and medical, are stickier. Monthly “supercore” prints can swing on a couple of categories; you get a soft number one month and a payback the next. I’ll admit I don’t remember if it was April or May this year when medical services spiked, pretty sure it was April, but the point stands: the noise masks the drift.

What to do with that? Treat 2.75-3.00% as a central planning case for expenses that reprice annually, keep a 2.25-2.50% long-run anchor for 5-10 year horizons, and stress for a sticky 3% scenario. Watch the CPI-PCE spread on anything with contractual escalators; a 25-50 bps “CPI tax” compounds faster than people think. And, yes, keep an eye on breakevens, when they move outside that 2-2.5% channel for more than a few weeks, funding costs react.. quickly.

3% isn’t the Fed’s target in 2025. It’s the line businesses are using to keep from being surprised twice.

Why some economists keep pitching 3% anyway

Quick reality check before the pitch: the Fed’s target is 2%. Full stop. But the case for a 3% target isn’t a Twitter hot take; it’s a set of arguments that’s been around since 2009-2010 and, given what we’ve seen since 2020, has new legs. Here’s the best version of it, no straw men.

• Zero lower bound risk. With a 2% target, “normal” nominal policy rates are roughly 2% + r*. If r* is 0.5-1.0%, you get a steady-state funds rate of ~2.5-3.0%. That leaves 250-300 bps to cut before you’re back at zero. We’ve needed a lot more than that in real recessions. The Fed hit the effective lower bound after 2008 and again in 2020, and relied on QE and forward guidance to add stimulus. Fed staff research (Kiley & Roberts, 2017) showed that with low r*, a 2% target could leave policy at the lower bound in 30-40% of downturns. Bump the target to 3%, and the steady-state rate moves up ~100 bps, giving more conventional room to cut when jobs are falling.
• Post‑pandemic “stickies,” especially housing. Measurement matters. Shelter is ~36% of the CPI basket as of 2024 (BLS), and owner’s equivalent rent moves with a 6-12 month lag to new-lease rents. That lag has kept measured core inflation higher than what real-time rent trackers suggest at various points. Add regulated and semi-regulated items that have repriced in lumpy waves, auto insurance rose 19% y/y in 2023 and stayed double‑digit for parts of 2024 (BLS), and you get a baseline that’s sticky a touch above 2%. You can fight that stickiness with tighter policy, sure, but the argument says you risk unnecessary labor slack for what is, partly, a measurement artifact.
• What if r* is higher now? A lot of folks went into 2021 thinking r* was near zero. Then the world changed. Real yields tell you something: 10‑year TIPS ran around 1.8-2.2% at points in 2024-2025, well above the 2010s average that hugged 0.5% or less. If the neutral real rate has moved up, even by 50-100 bps, a 3% target could line up better with stable employment and avoid chronic overtightening. Holston‑Laubach‑Williams estimates bounced post‑2020; not gospel, but directionally supportive that the 2010s were an outlier.
• Cost of missing low vs. high. This one sounds academic but it’s practical. The welfare loss from a few years at 3% inflation, when wages are still growing and unemployment is low, may be smaller than the loss from repeated deep recessions caused by hitting the lower bound. This was the Blanchard/Dell’Ariccia/Mauro (2010) line after the GFC, and it aged better than people expected. We learned in 2020 how quickly a negative shock can send unemployment from 3.5% to 14.7% (April 2020, BLS); getting back takes time, skills erode, and the scarring isn’t linear.

Two clarifications before my inbox lights up: 1) I’m not saying 3% is free. Inflation variance rises the higher you set the target. 2) I’m also not saying the post‑COVID supply weirdness lasts forever. It’s just that, right now, in Q4 2025-10‑year breakevens hanging in the 2.3-2.5% range and TIPS real yields near ~2% make a 3% conversation feel less theoretical and more about calibration.

My take, and I’ve changed it a bit since last year: if you believed the 2010s were the baseline, 2% made sense. If you think the 2020s are structurally different, higher r*, bigger supply shocks, housing measurement lag, then a 3% target is a coherent framework to reduce recession risk. Not a promise, not a pivot, just a different tradeoff curve. And, yeah, tradeoffs are the whole game.

Why the Fed resists changing the target

So why doesn’t the Fed just say “fine, 3%” and call it a day? Because credibility is the asset. You don’t spend it lightly. The biggest issue is reanchoring risk. If the public internalizes that 2% can morph into 3% when the going gets tough, the next time the Fed promises something, on inflation, on rates, on QE, those words carry less weight. What happens when promises carry less weight? Investors demand a cushion. That cushion shows up as higher term premia and wider risk spreads. The New York Fed’s ACM term premium estimate flipped positive in late 2023 and, this year, has hovered roughly around zero to +50 bps on the 10‑year, call it a barometer for how much insurance the market wants for future policy and inflation uncertainty. Raise doubts about the anchor, and that premium can creep higher.

Do markets actually care about the anchor right now? They do. In Q4 2025, 10‑year breakevens are hanging in the ~2.3-2.5% range and TIPS real yields are near ~2%. That combo says investors expect inflation near target over the long run and a real rate structure that’s higher than the 2010s. You shift the target to 3%, and investors will, rationally, ask for more compensation to hold long bonds. Not catastrophically more, but more. And more is enough when the Treasury has to roll massive size.

Second, global comparability matters. Most advanced economies have effectively standardized on ~2%: the ECB’s “symmetric 2%” (adopted in 2021), the Bank of England’s 2% remit, the Bank of Canada’s 2% midpoint within a 1-3% band (renewed in 2021), and the Bank of Japan’s 2% since 2013. Would the U.S. be an outlier at 3%? Yes. That’s not just optics; it complicates FX expectations, hedging programs, and cross‑border capital flows. A higher stated U.S. inflation aim embeds a persistent expected depreciation bias in the dollar in some models, traders will price it, even if imperfectly.

Then there’s the contract legacy, the plumbing. A staggering share of the financial system is built on 2% being the lodestar. We’ve got over $25 trillion in marketable U.S. Treasury securities outstanding (U.S. Treasury, 2025), roughly $12 trillion in agency MBS, and a multi‑trillion corporate bond market where coupon structures, covenants, and valuation models assume a 2% long‑run inflation norm. TIPS principal, CPI‑linked leases, long‑dated utility rate cases, wage escalators, reset the target and you reprice a lot of cash flows in one shot. I might be oversimplifying the mechanics, but the direction is right: a higher target ripples through discount rates, hurdle rates, and collateral haircuts. Not over years. Immediately.

One more practical point: officials haven’t left wiggle room. In 2024 and again this year, FOMC statements continue to say, verbatim, the Committee is “strongly committed to returning inflation to its 2 percent objective.” Chair Powell reiterated at Jackson Hole and in multiple 2025 pressers that changing the target is not on the table. Could they change their minds someday? Sure. Are they signaling any appetite now? No. Policy is oriented, rate path, balance sheet, communications, toward bringing PCE inflation back to 2%. That’s the guidance markets trade on, and, frankly, it’s why breakevens are where they are.

“We are committed to our 2 percent inflation objective. We are not considering changing that objective.”, Fed Chair Powell, public remarks in 2024-2025

So the short version, well, shorter, is: tweak the target and you tinker with credibility, you mess with global comparability, and you trigger a contract‑level repricing. That’s not just theory. It’s the whole market structure. And yes, I’m repeating myself because it’s the core point: credibility first, plumbing second, optics third. In that order.

Positioning your portfolio if 3% becomes the de facto reality (even if not the rule)

Here’s how I’m thinking about it in practice. The Fed keeps the 2% target; markets sometimes live closer to 2.5-3% realized inflation. You plan for both worlds and let cash flows, duration, and inflation protection do the work. Headlines are noisy; coupons, coupons are quiet.

Quick reality check on where we actually are right now: core PCE inflation is running around the mid‑2s on a 12‑month basis as of late summer 2025 (the July-August prints sat in the ~2.5% neighborhood). Market pricing agrees with “roughly 2-2.5%” over the medium run: 5‑year TIPS breakevens have hovered near ~2.25% and 10‑year near ~2.3-2.4% this fall. The 10‑year TIPS real yield has been around 2.0-2.2%, and the NY Fed’s ACM model has the 10‑year term premium modestly positive in Q3 2025 (call it ~0.5-0.8%). Thirty‑year mortgage rates? They’ve been bouncing around ~7% in recent weeks. I’m sharing that because portfolio choices hinge on these levels, not the press conference phrasing.

• Debt strategy: If you think term premia and mortgage rates are embedding a higher inflation path, err shorter on duration for new bond buys and liability management. Keep average duration tight enough that you can roll into higher coupons if the market keeps repricing inflation risk. On the household side, preserving refinance flexibility has real option value, yes, even if you’re paying a little more upfront. Example: a 7/1 ARM with clear refi provisions may dominate a 30‑year fixed if you believe rates could normalize lower over a 3-5 year horizon, but don’t kid yourself, document the break‑even. On the corporate side, stagger maturities; avoid the 2027-2028 maturity “cliffs” I’m seeing on too many private deals.
• Inflation hedges: Blend a TIPS ladder with selective real‑asset exposure. Don’t overpay when breakevens already price 2-2.5%. If 10‑year breakeven is ~2.3% and your base case is 2.6-2.8%, TIPS are attractive at today’s ~2% real yield; if your view is sub‑2.3%, nominal bonds win. Real assets: favor cash‑generative infrastructure and midstream over levered real estate that’s rate‑sensitive. And be picky, cap rates haven’t fully adjusted everywhere.
• Equities: Tilt toward firms with pricing power, asset‑light compounders, and short‑duration cash flows (think recurring revenue with high free‑cash conversion). Be careful with long‑duration growth that needs low real rates to “pencil.” With 10‑year real near ~2%, the duration math bites. I like businesses that can reprice annually and don’t need heroic terminal values to justify today’s multiples. Also, inventory‑light models have been quietly outperforming when working capital costs aren’t zero; that’s not accidental.
• Savings math: In financial plans, raise the assumed inflation from a hard 2% to a range (2-3%) and run sensitivity. Stress the plan, not your sleep. If a 2.75% inflation path reduces your safe withdrawal rate by 30-50 bps relative to a 2% base case, adjust the spend glidepath now rather than “later.” And yes, I know Monte Carlo already spits out a thousand paths, I still add a manual scenario or two; call me old‑school.
• Comp compacts: Salary negotiations and vendor contracts need clean index mechanics. Decide CPI‑U vs CPI‑W vs PCE, pick the measurement window, and cap/floor the escalator. Fixed 2% escalators have quietly transferred value to buyers in 2021-2024; don’t repeat that. I prefer CPI‑U, annual reset with a 1-4% band for multi‑year service agreements, simple, auditable, fewer surprises.
• Taxes and COLAs: Build buffers for timing lags. The IRS adjusts brackets annually using CPI‑U from a trailing period, so bracket creep can bite in high‑inflation spurts before the new thresholds catch up. Social Security COLA for 2025 benefits was 3.2% (announced October 2024), and the 2026 COLA will be set this month based on Q3 CPI‑W, benefits rarely match household inflation one‑for‑one. Plan for a 0.5-1.0 percentage point mismatch in any given year and carry a liquidity buffer to bridge it.

What I’m really saying: engineer your cash flows to be resilient to a 2-3% inflation band, and let the target debate be background noise. In 2013, when breakevens slid and everyone defintely over‑rotated into long duration (I did, too, mea culpa), the lesson was simple, build optionality. It’s boring. It works.

“Plan the cash flows, not the headlines.”

One last thing I almost forgot, if you’re sitting on a 3% mortgage from 2021, that prepayment option you’re holding is a gem; don’t trade it away lightly for a cosmetic cash‑out. I’d rather see you keep the cheap debt and ladder T‑bills at 5‑handles when available than reset the whole stack. That’s me thinking out loud; I won’t pretend there’s a one‑size answer.

Bottom line: The target is 2%, but plan like an adult

Here’s the plain‑English read: the Fed keeps saying 2% PCE, and they mean it. That target was adopted in 2012 and reaffirmed in the Fed’s January 2024 Statement on Longer‑Run Goals. They didn’t blink after the 2020 framework tweak either; “average inflation” wasn’t code for a new number, it was a patience policy. A formal shift to 3% would be a multi‑year process with papers, speeches, symposiums, internal votes, then public consultation, think years, not quarters. If you’re waiting for a press conference in December to change your mortgage strategy, you’re solving the wrong problem.

What’s the market imply right now? Breakevens still point at something in the low twos. As of September 2025, 5‑year TIPS breakevens have sat roughly ~2.2-2.5%, and 10‑year around ~2.2-2.4% (Bloomberg screens; it wiggles week to week). That’s not “mission accomplished,” but it’s not 3-4% either. Meanwhile, the 10‑year Treasury yield hanging in the 4s this fall reflects two things at once: sticky real rates and a term premium that’s back from the dead. The ACM 10‑year term premium flipped positive in 2023 and has generally hovered near +0.5% at times through 2024-2025, instead of the negative prints we got used to last decade. Translation: long rates can be higher than the sum of r* and expected inflation for a while, and yes, it matters for your asset mix.

So don’t bet the balance sheet on a rules change. You don’t need to. Do the adult thing and run two planning lanes:

• Policy signal: Base case stays 2% PCE. Treat any talk of 3% as a long runway idea. The Fed’s credibility is the product here, stability in expectations is worth a lot more than a quick fix.
• Investor takeaway: Model scenarios at both 2% and ~3% inflation. Use them for debt decisions (fixed vs. floating, refi timing), savings rates (how much cash to hold vs. T‑bills), and asset allocation (equities that can push through nominal pricing vs. duration that can bite you).
• Next steps if you want homework: a) read up on term premia’s comeback and what a positive premium does to fair value on the 10‑year; b) use breakevens to time TIPS, if your horizon is 5 years, compare your inflation view to the 5‑year breakeven, not a headline CPI print; c) check the tax math of bracket creep. Lots of items are indexed, but not all, NIIT thresholds, the $10k SALT cap (still in place for 2025), and Medicare IRMAA brackets can pinch when inflation runs a bit hot even if wages do okay.

There’s gray here. Always is. The probability‑weighted outcome still leans toward 2‑handle inflation over the medium term, but the planning error from pretending it’s guaranteed is bigger than the error from carrying a little extra liquidity and fixing key liabilities. Say it two ways because it matters: you plan for a band, not a point; you plan for a range, not a dot.

Credibility anchors markets; your plan should anchor your household. Different jobs, same idea, keep it boring, keep it robust.

And if you’re staring at a refinance screen: remember, real rates are doing more work in 2025 than they did last cycle, so the hurdle for extending duration is higher. I know, that’s annoyingly wonky; it’s also the thing that keeps people from re‑learning 2013 the hard way.

Frequently Asked Questions

Q: Should I worry about the Fed switching to a 3% inflation target and my mortgage getting pricier?

A: Short answer: not now. Fed officials have repeated across 2024 and this year that 2% PCE inflation is the goal. If they did move to 3% someday, long-term rates would likely drift higher over time, not overnight. Actionable bit: if you’re shopping for a home, stress-test your budget at rates 0.5-1.0 percentage point above today’s quotes. It keeps you honest.

Q: How do I adjust my portfolio if inflation is near 2% but markets keep whispering about 3%?

A: I’d hedge the edges without betting the farm. Keep core equity exposure diversified, then trim bond duration a touch (think laddering 1-5 year Treasuries or high-grade funds) so you’re less exposed if long yields creep up. Add a slice of TIPS, 5-15% is a reasonable band for most, to protect real purchasing power. For cash, use high‑yield savings or T‑bills, rolling every 4-13 weeks. If you own growth stocks with sky‑high multiples, balance them with profitable cash‑generators. I know, boring. Boring tends to work.

Q: What’s the difference between CPI and PCE for the Fed’s target, and why does it matter for my rates?

A: The Fed targets 2% inflation on PCE, not CPI. PCE updates its basket more dynamically and captures a broader set of spending (including healthcare paid by insurers/government), which usually makes it run a bit lower than CPI. Mortgage and bond markets anchor to that 2% long‑run PCE assumption. If expectations shifted to 3% PCE, nominal yields would likely be higher, which filters into loan rates and equity valuations. So yes, the yardstick matters.

Q: Is it better to refinance now or wait if I think long‑run inflation could settle closer to 3%?

A: Refi decisions hinge on math, not vibes. If you have an adjustable‑rate mortgage resetting in the next 12-24 months, and you can lock a fixed rate that lowers your projected payments over your expected holding period (after closing costs), I’d lean to acting. Why? If markets migrate toward assuming 3% PCE inflation over time, the 10‑year Treasury typically carries that into higher nominal yields, and 30‑year mortgages often sit ~150-200 bps above the 10‑year. That can push future refi quotes up, not down.

Here’s how I’d run it (I literally keep this in a spreadsheet):

• Get three written quotes (no points, low points, and buydown) and a zero‑cost option.
• Compute breakeven months: total costs divided by monthly savings. If you’ll stay past breakeven, green light.
• Stress‑test with rates 0.5-1.0 percentage point higher and lower. If the decision only works in a best‑case scenario, pass.
• If your FICO is just below a pricing tier, consider paying down revolving balances two months ahead to bump the score.

If you already hold a sub‑4% fixed from 2020-2021, don’t refinance just to “improve.” Keep it and prepay principal if you want faster amortization. One last thing, it’s Q4. Lenders are hustling to hit year‑end targets, so fee waivers pop up. Ask, politely. I do, and it weirdly works.

@article{will-3-inflation-become-the-feds-new-target-not-likely,
    title   = {Will 3% Inflation Become the Fed’s New Target? Not Likely},
    author  = {Beeri Sparks},
    year    = {2025},
    journal = {Bankpointe},
    url     = {https://bankpointe.com/articles/3-inflation-fed-target/}
}