Fed Focus Shifts to Timing as US Core PCE Report Looms

The upcoming US Core PCE report is set to have a significant impact on the Federal Reserve's monetary policy decision in October. Traders are pricing in 70% odds of a rate hike at the meeting, which would be the last Core PCE print before the Fed makes its move. The expected core PCE reading for August is 0.3% month-over-month (m/m), up from 0.2% in July, leaving the annual rate around 3.4%. A 0.4% core reading would be difficult for the Fed to dismiss and could strengthen the case for another move at the October meeting.

Consumer demand is also an important part of the release, with personal income expected to rise around 0.5% and spending forecasts clustered around 0.8% to 0.9%. A strong spending print would suggest households remain resilient despite higher rates, potentially making the Fed less comfortable assuming inflation will cool on its own.

The policy backdrop is straightforward, with the Fed raising rates by 25 basis points in September to 3.75% to 4.00%, while the latest dot plot showed the median policymaker expecting one additional quarter-point hike before year-end. The focus is now on timing, and a hot inflation print would favor the October debate moving in a more hawkish direction.