What does Wall Street think of the PCE? Goldman Sachs postpones expected Fed rate hike timing.

What does Wall Street think of the PCE? Goldman Sachs postpones expected Fed rate hike timing.

U.S. PCE inflation in August came in lower than expected , changing Wall Street’s assessment of the timing of the Fed’s next rate hike.

Goldman Sachs on Wednesday postponed its forecast for the Federal Reserve's second rate hike this year from October to December, while not ruling out the possibility that the Fed may ultimately decide that no further rate hikes are necessary.

Nick Timiraos, the “new Fed watchdog,” points out that previous PPI and CPI data indicated that the improvement in inflation had not continued, and the PCE had not changed this trend. Market price indicators remained at around 3% before and after the statistical method adjustment, and inflation had not continued to make progress toward the 2% target.

Capital Economics' chief North American economist believes that core price pressures are slightly less severe than previously feared, supporting a pause in rate hikes in October; BMO's senior economist believes that the proportion of the PCE price component with an annualized increase of more than 3% has decreased from 54% to 51%, still far above normal levels, and does not indicate that the inflation trend has substantially improved.

Regarding market pricing, the Chicago Mercantile Exchange's FedWatch Tool shows that the market currently expects a 39% probability of an October rate hike, down from about 45% before the PCE data release. The probability of a December rate hike has reached 90%.

Regarding US Treasury prices, the 2-year Treasury yield fell from 4.887% to around 4.864% after the PCE data was released, indicating that investors reduced their bets on a short-term rate hike by the Federal Reserve. However, the yield subsequently rebounded to fully recover the decline. The 10-year yield, on the other hand, continued to rise.

Meanwhile, US economic data continues to show strong resilience. Second-quarter GDP growth was revised significantly upward from 1.5% to 2.2%, and August consumer spending increased by 0.9%. This means that while the PCE figure has reduced the urgency of an October rate hike, it is not enough to fundamentally change the inflation and economic growth situation facing the Federal Reserve.

Goldman Sachs: October rate hike unlikely; second rate hike postponed to December.

Based on inflation data released on Wednesday and a speech by New York Fed President John Williams on Tuesday, Goldman Sachs economists have adjusted their forecasts for Federal Reserve policy, now expecting the second rate hike to occur in December, rather than the previously predicted October.

In a report, the Goldman Sachs economics team, led by Jan Hatzius, wrote that the August personal income and spending data released on Wednesday showed that core inflation rose less than expected; the core PCE price index rose 0.25% month-on-month and 3.01% year-on-year, "far below expectations."

Goldman Sachs projects that the core PCE price index will rise 3% year-over-year in the fourth quarter, "well below the median forecast of 3.4% from Federal Open Market Committee (FOMC) participants." The report states:

"Based on New York Fed President John Williams' remarks yesterday, we now believe that a rate hike in October is unlikely; we are postponing our predicted second rate hike to December, and we believe there is a high probability that the FOMC will ultimately determine that no further rate hikes are needed."

Timiraos: PCE has not significantly changed the inflation trend.

Timiraos points out that the most important message of this PCE report is that it has not significantly changed the inflation trend that the market had already grasped.

He believes that the inflation data for June and July were relatively good, but this was already known to the market beforehand; the August data showed that this improvement did not continue, and the market could actually see this after the PPI and CPI data were released.

Timiraos also pointed out that current market price indicators are running at around 3% both before and after statistical method adjustments. While the 12-month inflation reading doesn't look so unfavorable, inflation hasn't made any further progress toward the 2% target since April 2025.

Other Wall Street analysts' opinions

Stephen Brown, chief North American economist at Capital Economics, has a relatively dovish view on the PCE. Brown stated:

“Core price pressures were slightly less severe than previously feared, which provides some support for our view that the Fed will pause rate hikes in October.”

It also pointed out that after BEA adjusted the PCE statistical method, the historical data of core inflation was revised downward, and the related adjustments lowered the core inflation by about 0.3 percentage points in total; the downward revisions in June and July also reduced the annualized growth rate of core inflation over the past three months to 2%.

However, BMO senior economist Sal Guatieri offered a more cautious assessment, believing that the underlying trend of inflation has not shown meaningful improvement. He stated:

"The proportion of the PCE price component with an annualized increase of more than 3% has eased, from 54% to 51%. This proportion is still far above normal levels and hardly indicates that the underlying trend of inflation has been substantially improved."

Guatieri further stated that this would reinforce the Federal Reserve's assessment that further policy tightening is still needed to push inflation back to its target level.

According to market pricing data, the Chicago Mercantile Exchange's FedWatch Tool shows that the market currently expects a 39% probability of an October rate hike, down from about 45% before the PCE data release. The probability of a December rate hike, however, has reached 90%.

GDP was revised significantly upwards, but consumption remains resilient.

Economic data released on Wednesday showed that the U.S. second-quarter GDP growth rate was revised significantly upward to an annualized rate of 2.2%, far higher than the previously announced 1.5%.

Both consumer spending and investment, the two core components, outperformed previous figures. The key indicator measuring endogenous growth momentum—real private domestic final sales—was also revised upward to 4.6%.

The upward revision of investment categories highlights the role of AI infrastructure construction in driving economic growth, while the increase in the valuation of consumer spending indicates that households are generally in good financial condition, supported by a robust job market and a strong stock market.

Consumer spending rose 0.9% month-over-month in August, driven in part by increased spending at gas stations due to rising oil prices; income growth, however, slowed slightly to 0.2% from 0.3% in the previous month. The overall PCE price index rose 3.4% year-over-year, unchanged from the previous month, while accelerating to 0.3% month-over-month.

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