U.S. core PCE keeps September Fed hike expectations elevated

Traders Union
All News
Financial News
US core PCE, Fed hike outlook

Highlights

July core personal consumption expenditures price index met estimates, keeping September Fed hike odds near 40%, up from 33% a week earlier.
Stocks remained flat to lower and Treasury yields barely moved as investors assessed persistent inflation and awaited Nvidia’s quarterly results.
Analysts note resilient economic activity and elevated inflation above 2% keep policy pressure high, with AI and energy cited as key inflation drivers.

July inflation reading and market response

As reported by CNBC, the July core personal consumption expenditures price index matches Dow Jones estimates on both a monthly and annual basis, reinforcing the view that inflation is cooling too slowly to rule out another Fed move. Stocks remain flat to lower after the release, while Treasury yields are little changed as investors also wait for Nvidia’s quarterly results.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, says the mild upside inflation surprise and relative economic strength are not enough to shift the balance for September’s Federal Open Market Committee meeting. CME Group’s FedWatch tool shows fed funds futures imply a 40% probability of a quarter-point rate increase in September, roughly in line with the prior day and above the 33% level seen a week earlier.

Chris Zaccarelli of Northlight Asset Management says month-to-month inflation readings are worsening, but he still expects enough policymakers to prefer waiting for more data before deciding on a rate increase next month. He adds that the November national election would not stop the Fed from acting if conditions worsened, though the current data favor caution.

Wall Street views on policy and inflation risks

Other market participants say the report keeps pressure on policymakers because inflation remains above the Fed’s 2% target and economic activity still shows resilience. David Russell of TradeStation says strong consumption, spending and durable goods orders give the committee room to tighten without pushing the economy into recession, while Bret Kenwell of eToro warns that persistently high inflation could keep rates higher for longer and weigh on equities if yields rise.

Peter Boockvar of One Point BFG Wealth Partners says capital expenditure tied to GenAI data center construction continues to shape durable goods demand, while noting PCE often arrives weeks after CPI and PPI and rarely deviates much from expectations. Addison Maier of Janus Henderson Investors points to energy, tariffs and AI as this year’s main inflation drivers, with goods prices easing modestly but AI investment still strong and important for the path of U.S. inflation, growth and interest rates.

Heather Long of Navy Federal Credit Union says the effects of the war in Iran remain visible in fuel prices and that inflation is no worse in July, but is not improving either. She also says consumer fatigue is building, with inflation-adjusted spending flat in July, while warning that a trade war with Canada would add to inflation pressure.

Our earlier report on the Fed’s rate outlook amid stubborn inflation highlighted Boston Fed President Susan Collins’ view that another hike could be needed soon unless the data show sustained progress on price pressures. We also noted markets’ focus on the July core PCE print and on signals from Fed leadership at Jackson Hole, as policymakers weigh inflation risks alongside rising Treasury yields.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.