Market brief
Dovish Core PCE Revisions Shift Rate-Hike Outlook; October Move Seen Unlikely
Goldman Sachs lowered its full-year core PCE forecast and said the next potential hike is now December, with a growing possibility that no further tightening is needed.
Key points
- Downward revisions to July core PCE led Goldman Sachs to lower its full-year core PCE forecast; an October rate hike now appears unlikely, with the next potential hike pushed to December and a growing possibility that no further tightening is needed.
- Growth data remained firm with upward revisions to Q1 and Q2 GDP, but the bank cautioned that fading tax-refund support and higher energy prices will weigh on consumer spending later this year.
- Employment data stayed solid, with ADP showing continued private-sector job growth and wage growth broadly stable.
Sizable downward revisions to July core PCE inflation suggest underlying price pressures are likely to undershoot the Federal Reserve's 2026 forecast, leading Goldman Sachs to lower its full-year core PCE expectation and shift its rate-hike outlook, the bank said.
The inflation report was more dovish than expected, with the July core PCE revisions prompting a lower full-year core PCE forecast. Combined with John Williams’ comments that there is no need for urgency following the September meeting, an October hike now appears unlikely, with the next potential hike pushed to December and a growing possibility that the FOMC ultimately decides further tightening is unnecessary.
Growth data remained relatively firm, with upward revisions to Q1 and Q2 GDP largely reflecting stronger consumption and investment. However, the underlying commentary remains more cautious on the consumer, as the boost from larger tax refunds is expected to fade while higher energy prices create an additional headwind. The latest income and spending data were somewhat stronger than previously assumed, but this does not fundamentally alter expectations for slower consumer spending later in the year.
Trade data provided a drag on the growth outlook through stronger-than-expected imports, although this was partly offset by much stronger inventory accumulation. As a result, the Q3 GDP tracking estimate was only modestly reduced. Employment data also remained reasonably solid, with ADP showing continued private-sector job growth and wage growth broadly stable. Overall, the report points to softer underlying inflation alongside still-resilient growth, reducing the immediate case for further monetary tightening.
