The "Fed's favorite inflation gauge" came in below expectations, and Goldman Sachs no longer expects a rate hike in October.

US August PCE inflation came in below expectations, and is changing Wall Street's judgment on the timing of the Federal Reserve's next rate hike. Goldman Sachs on Wednesday pushed back its forecast for the Fed's second rate hike of the year from October to December, while not ruling out the possibility that the Fed ultimately concludes no further rate hikes are needed. Nick Timiraos, known as the "Fed whisperer," pointed out that previous PPI and CPI data showed that the improvement in inflation had not continued, and PCE has basically not changed this trend. Market price indicators are still running at around 3% both before and after the statistical methodology adjustment, and inflation has not continued to make progress toward the 2% target. The chief North American economist at Capital Economics believes that core price pressures are slightly weaker than previously feared, supporting a pause in rate hikes in October; a senior economist at BMO believes that the share of PCE price components with annualized gains exceeding 3% fell from 54% to 51%, still far above normal levels, and cannot show that the inflation trend has substantially improved. In terms of market pricing. The Chicago Mercantile Exchange's FedWatch Tool shows that the market currently expects about a 39% probability of a rate hike in October, down from about 45% before the PCE data was released. The probability of a rate hike in December has reached 90%. In terms of U.S. Treasury prices, the 2-year Treasury yield fell from 4.887% to around 4.864% after the PCE release, indicating that investors reduced their bets on a near-term Fed rate hike, but the yield then continued to rebound and fully recovered the decline. The 10-year yield continued to rise. At the same time, U.S. economic data still show strong resilience. U.S. second-quarter GDP growth was sharply revised up from the previous 1.5% to 2.2%, and consumer spending rose 0.9% in August. This means that although PCE reduced the urgency of an October rate hike, it is not enough to completely change the inflation and economic growth situation facing the Fed. Goldman Sachs: An October rate hike is unlikely, with the second hike postponed to December Based on the inflation indicators released on Wednesday and remarks by New York Fed President John Williams on Tuesday, Goldman Sachs economists adjusted their forecast for Fed policy, expecting the second rate hike to occur in December rather than October as previously forecast. The Goldman Sachs economics team led by Jan Hatzius wrote in a report that the August personal income and spending data released on Wednesday showed that the core inflation indicator rose less than expected; the core PCE price index rose 0.25% month over month and 3.01% year over year that month, "far below expectations." Goldman Sachs expects the fourth-quarter core PCE price index to rise 3% year over year, "far below the 3.4% median forecast of Federal Open Market Committee (FOMC) participants." The report said: "Combined with New York Fed President John Williams' remarks yesterday, we now believe an October rate hike is unlikely; we have pushed back the second hike in our forecast to December, and we believe there is a strong possibility that the FOMC ultimately determines no further rate hikes are needed." Timiraos: PCE does not significantly change the inflation trend Timiraos pointed out that the most core message of this PCE report is that it does not significantly change the inflation trend the market had already grasped. He believes that the inflation data for June and July performed relatively well, but this was already known to the market; the August data showed that this improvement did not continue, and after the release of the PPI and CPI data, the market could in fact already see this. Timiraos also pointed out that current market price indicators are running at around 3% both before and after the statistical methodology adjustment. Although the 12-month inflation reading does not look as unfavorable, since April 2025 inflation has not made further progress toward the 2% target. Views of other Wall Street analysts Stephen Brown, chief North American economist at Capital Economics, has a relatively dovish judgment on PCE. Brown said: "Core price pressures are slightly weaker than previously feared, which provides some support for our view that the Fed will pause rate hikes in October." He also pointed out that after the BEA's adjustment to the PCE statistical methodology this time, historical core inflation data were revised down, and the related adjustments together lowered core inflation by about 0.3 percentage points; the downward revisions for June and July also brought the annualized growth rate of core inflation over the past three months down to 2%. But Sal Guatieri, a senior economist at BMO, gave a more cautious judgment, believing that there has been no meaningful improvement in the underlying inflation trend. He said: "The share of PCE price components with annualized gains exceeding 3% has eased, from 54% to 51%. This share is still far above normal levels and can hardly show that the underlying inflation trend has substantially improved." Guatieri further said that this will reinforce the Fed's judgment that further tightening is still needed to bring inflation back to target. From the perspective of market pricing, the Chicago Mercantile Exchange's FedWatch Tool shows that the market currently expects about a 39% probability of a rate hike in October, down from about 45% before the PCE data was released. The probability of a rate hike in December has reached 90%. GDP sharply revised up, consumption remains resilient Economic data released simultaneously on Wednesday showed that U.S. second-quarter GDP growth was sharply revised up to an annualized 2.2%, far above the previously reported 1.5%. The two core components, consumer spending and investment, were both better than previous readings. The key indicator measuring underlying growth momentumreal private domestic final saleswas also revised up to 4.6%. The upward revision to the investment category highlights the boost to economic growth from artificial intelligence infrastructure construction, while the higher estimate for consumer spending indicates that household finances are generally sound, supported by a solid job market and a strong stock market. Consumer spending rose 0.9% month over month in August, partly driven by increased spending at gas stations due to higher oil prices; income growth slowed slightly to 0.2% from 0.3% the previous month. The overall PCE price index rose 3.4% year over year, unchanged from the previous month, while the month-over-month pace accelerated to 0.3%. This article is reprinted from "Wall Street See", author: Yang Chen; GMTEight editor: Chen Siyu.