Goldman Sachs (GS.US) has formally shifted its expectation for the Fed's second rate hike of the year from October to December, based on August PCE data and recent remarks from New York Fed President John Williams, while noting that the possibility of no further hikes at all has risen significantly.

This revision marks a major adjustment on Wall Street regarding the monetary policy path. The core logic is that the latest inflation gauge failed to extend earlier improvement, and market price measures have held steady at around 3% both before and after statistical methodology changes, still well above the Fed's 2% target.

"New Fed Wire" Nick Timiraos stressed that although June and July data were solid, August data showed the inflation improvement did not persist. Combined with earlier weak PPI and CPI readings, the market had already anticipated this trend, so the PCE data itself did not deliver颠覆性 information but rather confirmed the reality that inflation has been stuck at high levels since April 2025 and has failed to move toward the 2% goal.

In a report led by Jan Hatzius, Goldman Sachs economists noted that core PCE rose 0.25% month over month and 3.01% year over year, far below market expectations, prompting them to cut their fourth-quarter core PCE year-over-year forecast to 3%. That is significantly below the 3.4% median projection of FOMC participants, supporting the framework of a pause in October and possible action only in December.

Among analysts, views on inflation pressure differ markedly, reflecting a market battle over the timing of a policy shift. Capital Economics chief North America economist Stephen Brown took a relatively dovish stance, arguing that core price pressure is slightly weaker than previously feared, supporting a pause in October. He specifically noted that the BEA's methodological adjustment to PCE led to downward revisions in historical core inflation data, with related changes lowering core inflation by about 0.3 percentage points in total. Together with downward revisions in June and July, this brought the annualized three-month core inflation rate down to 2%, providing statistical support for a pause.

However, BMO (BMO.US) senior economist Sal Guatieri offered a more cautious judgment, arguing that the underlying inflation trend has not materially improved. Based on data compiled by Woofun AI, the share of PCE price components rising more than 3% on an annualized basis fell from 54% to 51%, but remains far above normal levels and hardly shows a fundamental reversal in the underlying inflation trend. Guatieri stressed that this structural pressure will reinforce the Fed's view that further tightening is still needed to bring inflation back to target, offsetting some of the easing expectations generated by cooler short-term data. This divergence highlights the complexity of current inflation data: slowing monthly gains offer some breathing room, while the year-over-year base and stubborn structural high-inflation components leave policymakers facing a dilemma.

Market pricing quickly captured this subtle shift in policy expectations, but volatility remained significant. CME (CME.US) FedWatch Tool data showed the market currently sees about a 39% chance of a hike in October, down from about 45% before the PCE release, indicating investors have reduced bets on near-term tightening. At the same time, the probability of a December hike climbed sharply to 90%, showing the market has clearly pushed the hike window later.

In the bond market, the 2-year Treasury yield quickly fell from 4.887% to around 4.864% after the PCE release, directly reflecting expectations of less urgent near-term Fed tightening. However, that decline did not last, and yields later rebounded and fully recovered the drop, showing lingering concerns about long-term inflation stickiness. The 10-year Treasury yield continued to climb, further confirming that long-term rates are being driven by both economic resilience and inflation expectations. This dynamic in the yield curve shows that although near-term hike odds have fallen, the market has not fully shifted to an easing trade. Instead, it has repriced the endpoint and pace of the hiking path, reflecting continued respect for the Fed's "higher for longer" policy stance.

Strong macroeconomic fundamentals provide the underlying support for inflation stickiness, making it difficult for the Fed to pivot to easing easily. U.S. second-quarter GDP growth was revised sharply higher to an annualized 2.2%, far above the previously reported 1.5%, showing growth momentum well above expectations. Both consumer spending and investment beat prior readings, and the key measure of underlying growth momentum, real final sales to private domestic purchasers, was also revised up to 4.6%, highlighting strong domestic demand. The upward revision in investment was mainly driven by AI infrastructure construction, while the higher consumer spending estimate indicates that household finances remain broadly healthy, supported by a solid job market and strong stock prices.

Consumer spending rose 0.9% month over month in August, partly driven by increased gasoline station spending amid higher oil prices; income growth edged down to 0.2% from 0.3% the prior month. The overall PCE price index rose 3.4% year over year, unchanged from the prior month, while the monthly pace accelerated to 0.3%. Taken together, these data show that while slower monthly PCE gains reduce the urgency of an October hike, strong economic growth and resilient consumption make it hard for inflation pressure to fade quickly. The Fed still needs to stay cautious in balancing growth and inflation, and any premature easing could risk a rebound in inflation.