If there are people within the Federal Reserve looking for evidence against another interest rate hike, then they are likely not to find support in the data released on Wednesday. The market expects that this data will show that price pressures continue, while consumers continue to spend.
According to Dow Jones Consensus expectations, the Personal Consumption Expenditures Price Index ( PCE ) – the Federal Reserve policymakers' primary inflation indicator – is expected to rise by 0.3% both on a month-over-month and year-over-year basis. The core index excludes food and energy costs.
Calculated on an annual basis, these two indicators are expected to rise by 3.7% and 3.3% respectively, remaining unchanged from July, and are still significantly higher than the Federal Reserve's target of 2%.
In other words, there are currently almost no signs that inflation will decline rapidly.
Senior economist Dan North ( Dan North ) said, "The Federal Reserve will see these data and then think, 'Hey, you know, core inflation hasn't fallen, and I have no expectations or reason to believe that it will start to decline in a convincing manner.'" He added, "It is still far above the target... So I think it has become so entrenched that the Federal Reserve cannot ignore it, nor can they explain it away."
Federal Reserve officials approved a 25-basis-point interest rate hike at their September meeting and included the possibility of another hike before the end of the year in their dot plot. Among the 18 Federal Open Market Committee (FOMC) officials who provided forecasts, with the exception of two, all indicated that they expected at least one more rate hike in 2026, and they also raised their consensus forecast for inflation.
Federal Reserve Chairman Kevin Warsh ( Kevin Warsh ) stated earlier this month at a press conference that hiring data, corporate investment, and private sector profits all indicate a healthy economic condition.
Wash said, "It's difficult for me to describe the overall financial environment as tight." The financial environment is an important factor considered by the Federal Reserve when formulating interest rate policies.
Other officials made statements
Similarly, Federal Reserve Board member Michael Barr ( Michael Barr ) stated on Tuesday that tariffs and the protracted war with Iran mean that "we have been disrupted in our progress towards the 2% target."
In addition, he added, "I haven't seen any clear trend that indicates a return to 2% in a timely manner."
Therefore, Barr reiterated that he believes the Federal Reserve may need to continue raising interest rates, although he did not specify the exact amount. The actions in September raised the Federal Reserve's benchmark lending rate range to 3.75% to 4%.
He said, "In my baseline scenario, it may still be necessary to further adjust policies to ensure that inflation returns to the target level within a reasonable time frame. We want to support sustainable and robust growth in order to achieve maximum employment, and price stability is crucial for this."
New York Fed Chair John Williams ( John Williams ) pointed out that there is a third driving factor for persistent inflation: the boom in artificial intelligence development and its demand for related goods.
"Fortunately, other indicators are more encouraging in terms of inflation prospects," he said. "Prices for housing services have slowed down, and there is no evidence that the labor market is putting additional pressure on inflation."
Williams added that the pressure of tariffs on commodity prices has largely subsided.
From a policy perspective, his wording is more dovish than that of Barr, stating that "there is no need to act hastily; we have time to gather more information." However, he also indicated that he expects there may still be a need to "raise interest rates once more" this year.
Inflation remains high, and consumers continue to spend.
The data released on Wednesday also brings another variable: the Bureau of Economic Analysis ( BEA ) will make retroactive revisions to the data from previous months, resulting in lower readings for those periods.
Specifically, BEA is backdating the calculation methods for its prices of legal services, software and computer accessories, as well as portfolio management services, to 2021. Several Wall Street institutions estimate that this adjustment could cause the annual inflation rate reading for July of PCE to be lowered by 0.2 to 0.3 percentage points, and may even bring the 12-month reading down to 3%.
This may make the "look-back" data look better, but it may not necessarily change the path ahead, as the prospects remain uncertain.
For example, Morgan Stanley expects that inflation data in the coming months will be “slightly unfavorable, before a more moderate trend reappears later on.”
Any decline will allow consumers to breathe a sigh of relief. Although the continuously rising prices have weakened consumer confidence data, they are still continuing to spend.
The market generally expects that consumer spending in August will increase by 0.8% month-on-month, which is at least partly due to another significant rise in gasoline prices. In July, the growth rate was only 0.2%.
Even with rising energy costs, U.S. banks report that spending remains strong.
As of the week of September 19th, debt and credit card expenditures increased by 6.9% year-on-year. A significant portion of this increase came from a surge in gasoline expenses, which rose by 26.5%. However, even excluding gasoline expenses, expenditures still grew by 5.7%.
For the Federal Reserve, the combination of persistently high inflation and consumers still being willing and able to spend does not provide a clear reason to believe that the interest rate hike in September was sufficient. Current market pricing indicates a high probability of another hike in October, with the possibility of another increase in December or January following that.
