The cooler-than-expected August PCE inflation report is reshaping Wall Street's view on when the Federal Reserve will next raise interest rates.

On Wednesday, Goldman Sachs pushed its forecast for the Fed's second rate hike of the year from October to December, while not ruling out the possibility that the Fed ultimately concludes no further tightening is needed.

Nick Timiraos, known as the "Fed whisperer," noted that earlier PPI and CPI data had already shown that inflation improvement was not continuing, and the PCE report did little to change that trend. Market price gauges remain running at around 3% both before and after statistical methodology adjustments, indicating that inflation has not made further progress toward the 2% target.

The chief North America economist at Capital Economics believes core price pressures came in slightly weaker than previously feared, supporting a pause in October. A senior economist at BMO noted that the share of PCE price components rising at an annualized rate above 3% fell from 54% to 51%, still far above normal levels and insufficient to suggest a meaningful improvement in the inflation trend.

On market pricing, the CME FedWatch Tool shows the market currently assigns about a 39% probability to an October hike, down from roughly 45% before the PCE release. The probability of a December hike has reached 90%.

In Treasury markets, the 2-year yield fell from 4.887% to around 4.864% after the PCE release, reflecting reduced investor bets on a near-term Fed hike, but yields subsequently rebounded to fully recover the decline. The 10-year yield continued to climb.

Meanwhile, U.S. economic data continues to show strong resilience. Second-quarter GDP growth was sharply revised up from 1.5% to 2.2%, and consumer spending rose 0.9% in August. This suggests that while the PCE report reduced the urgency for an October hike, it is not enough to fundamentally alter the inflation and growth landscape facing the Fed.

Goldman Sachs: October Hike Unlikely, Second Hike Pushed to December

Based on Wednesday's inflation data and remarks by New York Fed President John Williams on Tuesday, Goldman Sachs economists adjusted their Fed policy forecast, expecting the second rate hike to occur in December rather than the previously projected October.

The Goldman economics team led by Jan Hatzius wrote in a report that Wednesday's August personal income and spending data showed core inflation measures rose less than expected. The core PCE price index rose 0.25% month-over-month and 3.01% year-over-year in the month, "well below expectations."

Goldman expects fourth-quarter core PCE inflation to rise 3% year-over-year, "well below the FOMC participants' median projection of 3.4%." The report stated:

"Combined with New York Fed President John Williams' remarks yesterday, we now believe an October hike is unlikely; we are pushing our forecast for the second hike to December, and we think there is a significant possibility that the FOMC ultimately determines no further hikes are needed."

Timiraos: PCE Did Not Meaningfully Change the Inflation Trend

Timiraos pointed out that the most critical takeaway from the PCE report is that it did not significantly change the inflation trend the market had already grasped.

He believes that June and July inflation data were relatively favorable, but this had already been known to the market. The August data showed that this improvement did not continue, and after the PPI and CPI releases, the market could already see this.

Timiraos also noted that current market price gauges are running at around 3% both before and after statistical methodology adjustments. Although the 12-month inflation reading looks less unfavorable, inflation has not made further progress toward the 2% target since April 2025.

Other Wall Street Analyst Views

Capital Economics chief North America economist Stephen Brown took a relatively dovish view on the PCE. Brown said:

"Core price pressures came in slightly weaker than previously feared, which provides some support for our view that the Fed will pause in October."

He also noted that after the BEA's adjustment to PCE statistical methodology, historical core inflation data was revised down, with the combined adjustments lowering core inflation by about 0.3 percentage points. The downward revisions to June and July also brought the annualized pace of core inflation over the past three months down to 2%.

However, BMO senior economist Sal Guatieri offered a more cautious assessment, arguing that there has been no meaningful improvement in the underlying inflation trend. He said:

"The share of PCE price components rising at an annualized rate above 3% has eased from 54% to 51%, but this ratio remains far above normal levels and hardly suggests that the underlying inflation trend has materially improved."

Guatieri further stated that this would reinforce the Fed's view that further policy tightening is still needed to bring inflation back to target.

From a market pricing perspective, the CME FedWatch Tool shows the market currently assigns about a 39% probability to an October hike, down from roughly 45% before the PCE release. The probability of a December hike has reached 90%.

GDP Sharply Revised Up, Consumer Spending Still Resilient

Economic data released simultaneously on Wednesday showed that U.S. second-quarter GDP growth was sharply revised up to an annualized 2.2%, far above the previously reported 1.5%.

Both core components — consumer spending and investment — came in better than prior readings. Real final sales to private domestic purchasers, a key gauge of underlying growth momentum, was also revised up to 4.6%.

The upward revision in the investment category highlights the boost to growth from artificial intelligence infrastructure spending, while the higher consumer spending estimate indicates that household finances remain generally healthy, supported by a solid job market and strong stock market.

Consumer spending rose 0.9% month-over-month in August, partly driven by increased spending at gas stations amid rising oil prices. Income growth edged down from 0.3% the prior month to 0.2%. The overall PCE price index rose 3.4% year-over-year, unchanged from the previous month, while the monthly pace accelerated to 0.3%.