How does Wall Street view the PCE? Goldman Sachs delays expectation for Fed rate hike

U.S. August PCE inflation came in below expectations, which is shifting Wall Street's views on the timing of the Federal Reserve’s next rate hike.

Goldman Sachs on Wednesday delayed its forecast for the Fed’s second rate hike this year from October to December, and does not rule out the possibility that the Fed might ultimately decide no further hikes are needed.

"New Fed News Agency" reporter Nick Timiraos noted that previous PPI and CPI data indicate that improvements in inflation have not continued, and PCE has done little to change this trend; market price indicators remain around the 3% level both before and after adjustments to calculation methods. Inflation has not made further progress towards the 2% target.

Capital Economics’ Chief North America Economist believes that core price pressures are slightly less than previously feared, supporting a pause in hikes in October. BMO’s Senior Economist notes that the proportion of PCE price components rising at over 3% annually dropped from 54% to 51%, which is still far above normal levels and does not indicate a meaningful improvement in the inflation trend.

On market pricing, CME FedWatch Tool shows the probability of a rate hike in October is currently around 39%, down from about 45% before the PCE data release. The probability of a rate hike in December has reached 90%.

As for U.S. Treasury prices, the yield on the 2-year U.S. Treasury note dropped from 4.887% to about 4.864% when the PCE data came out, indicating investors lowered their bets on a short-term hike by the Fed, but the yield then recovered completely. The 10-year yield continued to climb.

Meanwhile, U.S. economic data continues to show notable resilience. The U.S. second quarter GDP growth rate was sharply revised up from the previous 1.5% to 2.2%, and consumer spending in August increased by 0.9%. This means, though the PCE figure has lessened the urgency for an October rate hike, it is not enough to fundamentally change the inflation and economic growth landscape faced by the Fed.

Goldman Sachs: Low Likelihood of October Hike, Second Hike Postponed to December

Based on the inflation data released Wednesday, as well as a speech by New York Fed President John Williams on Tuesday, Goldman Sachs economists have revised their forecasts for Fed policy, now expecting the second rate hike to take place in December rather than the previously anticipated October.

The Goldman economics team led by Jan Hatzius wrote in a report that the August personal income and spending data released Wednesday showed core inflation figures coming in below expectations; the core PCE price index rose 0.25% month-on-month and 3.01% year-on-year in August, "well below expectations."

Goldman predicts that in the fourth quarter, the core PCE price index will rise 3% year-on-year, "well below the Federal Open Market Committee’s (FOMC) median participant forecast of 3.4%." The report says:

“Combined with New York Fed President John Williams' comments yesterday, we now see little chance of a hike in October; we are pushing our forecast for the second hike to December, and we think it is increasingly likely the FOMC ultimately determines no additional hikes are necessary.”

Timiraos: PCE Did Not Significantly Change Inflation Trend

Timiraos pointed out that the most important message in this PCE report is that it has not significantly shifted the inflation trend the market was already aware of.

He believes that inflation data in June and July was relatively positive, but this was already well known in the market; the August figure shows this improvement has not continued, and after the PPI and CPI data was published, this was already apparent to the market.

Timiraos also noted that market price indicators are running around the 3% level, both before and after recent statistical methodology adjustments. Although the 12-month inflation readings do not look too bad, since April 2025, inflation has made no further progress toward the 2% target.

Other Wall Street Analysts’ Views

Capital Economics Chief North America Economist Stephen Brown is relatively dovish on the PCE. Brown stated:

“Core price pressures are a bit less than we had feared, lending some support to our view that the Fed will pause rate hikes in October.”

He also noted that, after the BEA revised its PCE calculation methods, historical core inflation data was adjusted downward, lowering core inflation by roughly 0.3 percentage points in total; downward revisions to June and July figures lowered the annualized core inflation rate for the past three months to 2%.

However, BMO Senior Economist Sal Guatieri gave a more cautious judgment, believing the underlying trend in inflation showed no meaningful improvement. He said:

“The share of PCE price components rising at an annualized rate above 3% has eased, dropping from 54% to 51%, but that share is still well above normal and hardly signals any meaningful improvement in underlying inflation trends.”

Guatieri further stated this strengthens the Fed’s judgment that further tightening is still needed to help drive inflation back to target levels.

In terms of market pricing, the CME FedWatch Tool shows that the probability of a rate hike in October is around 39%, below the roughly 45% seen before the PCE data release. The probability of a December hike has reached 90%.

Economic data released simultaneously on Wednesday showed that the U.S. second-quarter GDP growth rate was sharply revised up to an annualized 2.2%, well above the previously released figure of 1.5%.

Both consumption and investment, two key sub-indices, were better than previous values. A critical indicator of endogenous growth momentum—real final sales to private domestic purchasers—was also revised upward to 4.6%.

Upgrades in the investment category highlight the driving role of AI infrastructure construction in economic growth, while the higher consumption spending estimate suggests that, supported by a robust job market and strong equity markets, household financial conditions remain broadly healthy.

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