Inflation remains front and center as the Fed holds

Shock-driven inflation should moderate enough for the Federal Reserve to make only one more rate increase in 2026 and remain on hold through 2027.

• The Fed held its target rate at 3.75%–4% on October 28, 2026, while markets expected a second 2026 hike in December and Vanguard shares that view.
• Vanguard attributes current core inflation to tariffs, energy prices, and AI-related demand, while underlying inflation excluding these shocks is closer to the Fed’s 2% target.
• Tariff-driven price increases from early 2025 should roll off in April and May 2027, bringing core PCE inflation toward 2.5% by late spring through this mechanical effect alone.
• Oil prices have stayed near $100 per barrel for much of 2026, but their inflation contribution should remain limited without renewed and sustained upward pressure.
• AI-related inflation is expected to add 30–40 basis points to year-over-year core inflation through 2027 before moderating in 2028.

Takeaway: Vanguard expects core PCE inflation to end 2027 around 2.5%, supporting one further Fed hike by year-end 2026 and a hold in 2027, although renewed underlying inflation or an unusually strong AI investment boom could require tighter policy.