PCE cools down Goldman Sachs (GS.US) delays interest rate hike, economic resilience remains

According to Woofun AI, Goldman Sachs (GS.US), based on August personal consumption expenditure (PCE) data and the latest statement by New York Federal Reserve Chairman John Williams, officially postponed the expectation that the Fed will raise interest rates for the second time in the year from October to December, and indicated that the possibility that no further rate hikes will eventually be needed has increased significantly.

This forecast adjustment marks a major correction to Wall Street's monetary policy path. The core logic is that the latest inflation indicators have failed to continue the previous improvement trend, and market price indicators have stabilized at about 3% before and after the statistical method is adjusted, and there is still a clear gap from the Federal Reserve's 2% target.” New Federal Reserve News Agency “Nick Timiraos” emphasized that despite the good performance of the June and July data, the August data showed that the improvement in inflation did not continue. Combined with the previous weak performance of PPI and CPI, the market had already predicted this trend. Therefore, the PCE data itself did not bring disruptive information, but rather confirmed the reality that inflation had remained high since April 2025 and failed to move towards the 2% target.

Goldman Sachs's economics team, led by Jan Hatzius, clearly stated in the report that the core PCE price index rose 0.25% month-on-month and 3.01% year-on-year, far below market expectations. This prompted them to lower their fourth quarter core PCE year-on-year growth forecast to 3%. This figure is significantly lower than the 3.4% median forecast forecast of the Federal Reserve Open Market Committee (FOMC) participants, thus supporting the judgment framework for suspending interest rate hikes in October and possible action only in December.

At the level of analysts' opinions, there are significant differences in the interpretation of inflationary pressure by different institutions, reflecting the market's game over the timing of policy changes. Stephen Brown, chief North American economist at Capital Economics, takes a relatively dovish stance, believes that the pressure on core prices is slightly lower than previously feared, and supports the view that interest rate hikes will be suspended in October. In particular, he pointed out that the US Department of Commerce's Bureau of Economic Analysis (BEA)'s adjustment to the PCE statistics method led to a downgrade of core inflation historical data, and the relevant adjustments reduced core inflation by about 0.3 percentage points in total; in addition, the downward effects of June and July reduced the annualized growth rate of core inflation to 2% in the past three months. This data provided statistical support for suspending interest rate hikes.

However, BMO (BMO.US) senior economist Sal Guatieri gave a more cautious judgment, believing that there has been no substantial improvement in the underlying trend of inflation. According to data compiled by Woofun AI, although the proportion of PCE price components with an annualized increase of more than 3% fell from 54% to 51%, it is still far above normal, which hardly indicates that the underlying trend of inflation has been fundamentally reversed. Guatieri stressed that this structural pressure will reinforce the Fed's judgment that policies still need to be tightened further to push inflation back to target levels, thereby offsetting the easing expectations brought about by some short-term data cooling.

This disagreement highlights the complexity of current inflation data: on the one hand, the slowdown in month-on-month growth provides breathing room; on the other hand, the year-on-year base and structural high inflation component are still stubborn, leaving policymakers facing a dilemma.

The market pricing response quickly caught this subtle change in policy expectations, but the volatility is still significant. According to Chicago Mercantile Exchange (CME.US) FedWatch Tool data, the market currently expects the probability of interest rate hikes in October to be about 39%, lower than about 45% before PCE data was released, indicating that investors' bets on short-term austerity have declined.

Meanwhile, the probability of interest rate hikes in December climbed sharply to 90%, indicating that the market has clearly moved the interest rate hike window backwards. In the bond market, the 2-year US Treasury yield fell rapidly from 4.887% to around 4.864% after the PCE data was released, which intuitively reflects investors' expectations that the urgency of the Fed's short-term interest rate hike will decline.

However, this downward trend did not continue, and yields continued to rise and completely recovered their decline, indicating that market concerns about long-term inflationary stickiness still exist. The 10-year US Treasury yield continued to rise, further confirming that long-term interest rates are driven by both economic resilience and inflation expectations.

This dynamic change in the yield curve shows that although the probability of short-term interest rate hikes has declined, the market has not completely switched to easy trading, but has instead repriced the end point and pace of the rate hike path, reflecting continued respect for the Federal Reserve's “higher and longer” policy position.

The strong resilience of macroeconomic fundamentals provides underlying support for inflationary stickiness, making it difficult for the Federal Reserve to easily shift to easing. The US GDP growth rate for the second quarter was drastically raised to 2.2% annualized, far higher than the 1.5% previously announced, showing that the momentum of economic growth far exceeded expectations. Both core segments of consumer spending and investment were superior to previous values. Among them, the key indicator for measuring endogenous growth momentum — actual final sales of private domestic buyers — was also raised to 4.6%, highlighting strong domestic demand. The improvement in the investment category is mainly due to the driving effect of artificial intelligence infrastructure construction on economic growth, while the increase in consumer spending estimates indicates that with the steady job market and strong support from the stock market, the financial situation of residents is generally good. Consumer spending increased 0.9% month-on-month in August, partly driven by increased gas station spending driven by rising oil prices; revenue growth fell slightly to 0.2% from 0.3% last month. The overall PCE price index rose 3.4% year over year, the same as the previous month, and accelerated to 0.3% month-on-month.

This series of data shows that although the slowdown in PCE's month-on-month growth rate reduced the urgency of raising interest rates in October, strong economic growth and consumer resilience made it difficult for inflationary pressure to quickly subside. The Federal Reserve still needs to be cautious between balancing growth and inflation, and any premature easing may trigger the risk of a rebound in inflation.