The Fed can’t cut rates even as growth stalls — because inflation won’t let it

The U.S. economy is slowing fast, but inflation is still too high for the Federal Reserve to respond with rate cuts. Fourth quarter 2025 GDP growth was revised down to 0.5%, a steep drop from the 4.4% pace in the previous quarter. That kind of slowdown would normally tilt the Fed toward cutting interest rates to support growth. This time, it can’t. Headline PCE inflation held at 2.8% year-over-year in February 2026, while core PCE — the measure the Fed watches most closely — remained at 3.0%. Both measures rose 0.4% from the prior month, a pace that keeps inflation well above the Fed’s 2% target. That persistence leaves policymakers boxed in. The 10-year Treasury yield has stayed near 4.3%, and real yields remain high enough to keep financial conditions restrictive. For households, that means borrowing costs on mortgages, credit cards, and consumer loans stay elevated — even as the economy loses steam. The Fed’s hands are tied: weak growth demands stimulus, but sticky inflation prevents it. The result is a policy stalemate that prolongs high real yields and delays any relief for consumers.