PCE Report to Fuel Rate Hike Expectations Despite Steady Inflation

The Federal Reserve's next move is being closely watched ahead of the release of August's PCE inflation data on Wednesday. Economists expect the report to show that PCE inflation held steady at a 3.7% year-over-year pace, far above the central bank's 2% target.

Despite the anticipated numbers, the market is still pricing in another rate hike for the next FOMC meeting on October 28, with a 68% probability of tightening estimated by Fed funds futures.

The ongoing rise in Treasury yields has been driven by inflation anxiety, concerns about ballooning federal debt, and recent strengthening in economic activity. The 2-year yield has reacted to the September 16 rate hike by matching the increase, indicating that the market's expectation for more policy tightening remains unchanged.

A significant downside surprise in the PCE report could potentially give the Fed more space to delay another hike, but for now, the bond market is downplaying this possibility. The Cleveland Fed's nowcast projects that PCE inflation's one-year trend will hold at or near current levels through September.