Cool PCE data cuts October Fed hike odds to 36%

Summary

• Traders now price a 36% chance of an October Fed hike, down from roughly even odds.
• Core PCE rose 0.2% in August, below the 0.3% consensus in a Bloomberg survey.
• Long-dated yields still climbed, with 30-year Treasuries hitting 5.63%, the highest since 2002.

The latest

Odds of an October rate increase from the Federal Reserve fell to about 36% Wednesday, down from close to a coin flip before the release of the central bank's preferred inflation gauge. Two-year Treasury yields dropped as much as 5 basis points to 4.82%. Long-dated debt moved the other way, with 30-year yields rising to levels last seen more than two decades ago.

Details

• The inflation print: The personal consumption expenditures price index rose 0.3% from the prior month in August, Bloomberg reported. Stripping out food and energy, the core measure gained 0.2%, below the 0.3% economists had projected in a Bloomberg survey. The release also carried methodological changes to how inflation is calculated.
• The long end: Thirty-year Treasury yields jumped as much as 6 basis points to 5.63%, the highest since 2002, according to Bloomberg. The move followed data showing US consumer spending rose in August at its fastest pace in more than a year, reinforcing the view that the economy can absorb higher borrowing costs.
• The short end: Two-year yields, the maturity most sensitive to the Fed policy path, fell as much as 5 basis points to 4.82%, their lowest in more than a week. The split between the two ends of the curve left traders pricing softer near-term policy alongside a heavier long-run debt burden.
• The Williams signal: October hike expectations had already begun sliding Tuesday, after New York Fed President John Williams said one further upward adjustment to the target range may be appropriate later this year to contain inflation. Bloomberg reported that Fed officials raised the benchmark rate earlier this month for the first time since 2023.
• Supply pressure: Bloomberg attributed part of the move at the long end to heavy government bond supply. The US government said it plans to accept up to $6 billion of long-dated debt Thursday under Treasury Secretary Scott Bessent's expanded buyback program.
• Global spillover: The Bloomberg Global Aggregate government bond index has dropped 2.1% since June, the steepest three-month decline since the end of 2024. The selloff places the latest US moves inside a broader repricing of sovereign debt rather than a purely domestic reaction to one data release.
• The pricing gap: Before the PCE release, markets were split almost evenly on an October move. The 36% reading marks a clear retreat from that position, though it leaves a hike firmly on the table rather than excluded from the outlook.

Background

Fed officials reversed course this month with their first rate increase since 2023, shifting the policy debate from how fast to cut to how far to tighten. That pivot makes every inflation print a test of whether further hikes are still required.

Between the lines

The two ends of the curve are answering different questions. Soft core PCE speaks to the near-term policy path, pulling two-year yields down. Resilient consumer spending, a $6 billion buyback operation and heavy issuance speak to long-run supply and growth, pushing 30-year yields to 2002 highs. A 2.1% drop in the global government bond index since June suggests the long-end pressure is not a US-only story.

What's next

The Fed's October meeting is the next test of whether Williams's one further adjustment materializes. Watch Thursday's buyback operation for demand at the long end, and the next PCE and consumer spending readings before the decision.

Source: Bloomberg News