August PCE inflation held at 3.4% year over year, while core PCE came in below forecasts. Futures-implied odds of an October Fed hike fell to 37%, and stocks rose modestly.
The BEA put August headline PCE inflation at 3.4% year over year, unchanged from July. Futures markets lowered the chance of an October Federal Reserve rate hike after the release. Rate expectations affect Treasury yields and the cost of mortgages, credit cards and other loans.
The report offered some relief. It did not prove inflation is under control or that borrowing costs will fall soon.
Real consumer spending increased by $92.8 billion, or 0.6%, in August, according to the BEA, indicating continued strength in domestic demand.
Inflation came in below forecasts
The personal consumption expenditures price index, or PCE, rose 3.4% from a year earlier in August. That matched July and was down from a 3.8% peak in May. Forecasters had expected a 3.7% annual increase. The BEA reported a 0.3% monthly rise in headline PCE. Revised data also put July's annual rate at 3.4%.
Core PCE excludes volatile food and energy prices. It rose 0.2% in August and stood at 3% year over year for the third month in a row, according to the BEA's August release. The gap between forecasts and the reported figures moved markets. Inflation remains above the Fed's 2% target, but the data did not show the pickup many analysts expected. The report weakened the case for an imminent rate increase. It did not rule one out.
New York Fed President John Williams said he saw no urgency for further monetary tightening. His comments added to the cooling of expectations for an October rate increase.
Rate bets shifted quickly
After the release, futures pricing put the odds of a 25-basis-point hike to a 4%-4.25% federal funds rate at 37%. The odds stood at 51% the day before and 70% a week earlier, according to a Reuters market report. These are market bets, not a Fed commitment. Traders still see a chance of one increase by year-end, but expectations have shifted more toward December than October. The next Federal Open Market Committee meeting is scheduled for Oct. 27-28. Policymakers will have more economic data before they decide.
The S&P 500 rose 0.5% in late-morning trading Wednesday. The Nasdaq Composite gained 0.9%. Both indexes got a lift after the PCE report, though the moves were modest. The figures alone do not explain the session. Technology shares may also have benefited from the previous day's White House meeting of leading AI executives. The meeting ended with an agreement to work together on AI safety without formal regulations.
Rate expectations are only one influence on stocks. Earnings prospects and the market's focus on artificial intelligence also matter. For a wider look at yields and other pressures on investors, see this market signals analysis. Higher Treasury yields have already put pressure on borrowing costs. A lower chance of another hike is a change in expectations, not an immediate cut in the rates households pay.
More data still matters
The next tests are close. The September employment report is due Friday, and the Consumer Price Index is scheduled for later in October. Both could affect the Fed's assessment. The next PCE report will arrive after the October meeting. Policymakers must weigh the cooler August reading against new evidence on prices and jobs.
There is a difference between slower inflation and falling prices. August PCE showed prices rising more slowly than forecasts implied. The overall price level did not decline. Core inflation held at the same annual rate for three months, which is encouraging, but inflation remains above the Fed's target.
For investors, the report offers a modestly supportive signal: markets now see a smaller chance of another near-term hike. For households, it is not yet a reason to expect credit-card APRs or mortgage rates to fall. Treasury yields and lenders' pricing still matter. The takeaway is limited: inflation came in cooler than expected, easing pressure for an October increase. The employment report and CPI could still change the outlook.
