The Inflation Surprise
Core PCE only gained 0.1% in August, below the consensus forecast, while headline PCE was higher at 0.4%. Goods prices cooled, but services inflation remained high. The softer core reading supports the case for holding rates steady at the next meeting, but it also raises the question of whether the improvement will last.
The Consumer Spending Paradox
Consumer spending went up by 0.9% in August, while personal income rose only 0.2%. Households are saving less to fund purchases, pushing the saving rate lower. Strong spending keeps demand high and complicates the Fed’s inflation fight, although a bigger disaster is coming if income growth does not accelerate or spending slow for the pace to continue.
Market Repricing and Goldman’s Forecast
Traders reduced the odds of a November rate hike after the PCE report. Goldman Sachs pushed its forecast for the next hike to December and said the Fed may stop after that. Treasury yields and the dollar moved as investors adjusted to a later hike. The reaction shows that inflation data still drives rate expectations.
The Fed’s Internal Debate
Fed officials disagree about whether another hike is necessary. Some point to inflation above target and strong spending as reasons to tighten again. Others argue that past hikes are still working through the economy and that more tightening could slow growth too much. The December meeting will depend on jobs, retail sales, and inflation data.
What to Watch Next
The September jobs report will show whether wage growth is slowing, while retail sales and consumer confidence will confirm whether spending can continue without more income growth. Emerging markets face pressure from higher U.S. rates and a stronger dollar and the Fed’s next move remains tied to whether inflation falls further or stalls.
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