U.S. August PCE Inflation Misses Forecasts; Goldman Sachs Pushes Next Hike Call to December

U.S. August PCE inflation printed below expectations, prompting a reassessment on Wall Street of when the Federal Reserve might deliver its next rate increase. Goldman Sachs on Wednesday shifted its call for the Fed's second hike of the year to December from October, and said policymakers could ultimately decide no further tightening is needed. Core PCE rose 0.25% month over month and 3.01% year over year, which Goldman described as well below consensus. The bank expects core PCE inflation to run at 3% year over year in the fourth quarter, under the 3.4% median projection among FOMC participants. Citing Tuesday remarks from New York Fed President John Williams alongside the new inflation figures, Goldman said the odds of an October move look low. Nick Timiraos of "New Fed Wire" argued the report did little to change the prevailing inflation narrative. Earlier PPI and CPI releases had already suggested the improvement seen in June and July did not extend into August. He added that market-based inflation gauges have hovered around the 3% area both before and after recent statistical methodology adjustments. Even if the 12-month reading looks less troubling, he said inflation has made no additional progress toward the 2% target since April 2025. Other economists split on the implications. Capital Economics' Chief North American Economist Stephen Brown said underlying pressures appear slightly less intense than previously feared, reinforcing his view that the Fed can pause in October. He noted BEA revisions tied to the methodological update trimmed historical core inflation by about 0.3 percentage points and pulled the past three months' annualized core pace for June and July down to 2%. BMO Senior Economist Sal Guatieri was more cautious, pointing to breadth measures that still look elevated. The share of PCE price components running at annualized increases above 3% eased to 51% from 54%, he said, but remains far from normal and offers little evidence of a meaningful shift in the underlying inflation trend. In his view, the data support the Fed's case that additional tightening may still be required to return inflation to target. In rate markets, CME's FedWatch Tool showed the implied probability of an October hike at 39%, down from about 45% ahead of the release. The implied odds of a December hike stood at 90%. Treasury moves were choppy. The 2-year yield dipped from 4.887% to around 4.864% immediately after the PCE data, reflecting reduced near-term hike pricing, then rebounded to erase the decline. The 10-year yield continued to climb. Separate U.S. data underscored the economy's resilience. Second-quarter GDP growth was revised up sharply to a 2.2% annualized pace from 1.5%, with both consumption and investment revised higher. Real final sales to domestic purchasers, a key gauge of underlying demand, was revised up to 4.6%. The stronger investment profile highlighted the boost from artificial-intelligence infrastructure buildout, while firmer consumption suggested household finances remain supported by a solid labor market and resilient equities. Consumer spending rose 0.9% month over month in August, partly reflecting higher gasoline-station outlays amid rising oil prices. Personal income growth eased to 0.2% from 0.3% the prior month. Headline PCE inflation was unchanged at 3.4% year over year, while the monthly pace accelerated to 0.3%.