U.S. core PCE in August lower than expected Fed rate hike pace may slow

The U.S. Federal Reserve's (Fed) preferred inflation gauge, the core personal consumption expenditures (PCE) price index, fell below market expectations in August. Fed policymakers said it may take some time to evaluate more data, so there is no need to rush to raise interest rates again. Goldman Sachs postponed the next Fed rate hike from October to December. U.S. stocks rose in pre-market electronic trading on the 1st.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said that even though the U.S. core PCE increased by 3% annually in August, which was lower than market expectations, it was still higher than the 2% inflation target set by the Fed. He said: "There are many different inflation indicators, but the numbers are all close to 3%, and they have been high for more than five years. I don't think the latest PCE index will change my view on inflation."

However, New York Fed President John Williams, who is also the vice chairman of the Federal Open Market Operations Committee (FOMC), suggested that since the Fed has already raised interest rates once in September, it may take some time to evaluate more data, so there is no need to rush to raise interest rates again. It may be appropriate to raise interest rates again later this year.

The Fed raised interest rates by 1 percentage point (0.25 percentage points) after the September meeting to curb inflation, marking the first rate increase in three years. The interest rate dot plot released by the Fed after the meeting showed that policymakers predict at least one more interest rate hike before the end of this year. Coupled with the hawkish remarks of Fed Chairman Washer, many traders are betting that the Fed may raise interest rates for a second time in October.

However, after Williams' speech, the interest rate futures market showed that the probability of the Fed raising interest rates by 1 point after the October meeting has dropped to about 38% from 71% a week ago. Goldman Sachs also postponed the Fed's next interest rate hike from October to December because the PCE index in August was lower than expected. It also pointed out that "the FOMC is likely to ultimately conclude that there is no need to raise interest rates further."

Political sensitivity may be another reason for the Fed to postpone raising interest rates in October, because the United States will hold midterm elections on November 3. Raising interest rates at this time may cause dissatisfaction with President Trump.