Core PCE and GDP Data Determine Federal Reserve Rate Decisions

The US central bank Federal Reserve bases its interest rate decisions on the PCE price index, published monthly by the Bureau of Economic Analysis. The core index excluding food and energy – Core PCE – is considered the key gauge of underlying inflation. This week, new PCE data and third-quarter 2026 GDP figures will be released, which will have significant bearing on future monetary policy.

Current State of Core Inflation

The Federal Reserve Bank of Cleveland's nowcasting data showed a Core PCE inflation rate of 3.05 percent in early October. Between October 8 and 14, the rate rose to 3.15 percent, an increase of 0.1 percentage points. These current values are below the Federal Open Market Committee's median projection from June 2026, which expected Core PCE inflation of 3.3 percent for the full year 2026.

In June, the FOMC also indicated a range of 3.2 to 3.5 percent as the central tendency for 2026. The March projection of the same year had also predicted 3.3 percent. For the following years, the Fed expects a significant decline: the median for 2027 stands at 2.5 percent, for 2028 at 2.1 percent – approaching the official target of 2 percent.

The Fed staff's estimates for the FOMC meeting on September 15 and 16, 2026, showed that total inflation by PCE measure had risen to 3.8 percent in August 2026. The FOMC published the corresponding minutes on October 7, 2026.

Monetary Policy Scenarios

The Fed's two percent inflation target is officially measured by the PCE price index, not the more frequently cited Consumer Price Index (CPI). The PCE index captures price changes for goods and services purchased by US consumers and is published monthly in the Personal Income and Outlays report. Quarterly and annual data are also available in GDP releases.

The current nowcasting values of 3.15 percent are 0.15 percentage points below the FOMC's June projection. Should this trend be confirmed in the official data, the Fed would have room for further rate cuts. If core inflation rises above the values projected in June, the central bank is likely to take a wait-and-see approach.

The pace of inflation decline is also crucial. The projections show that the Fed expects a gradual convergence towards the two percent target in 2027 and 2028. Slower progress could delay rate cuts, while stronger declines would permit additional easing.

GDP Growth and Monetary Policy Space

Third-quarter 2026 GDP figures will be released on October 29. A preview published on October 22 expected stronger growth alongside slowing inflation. The FOMC's June projections had estimated real GDP growth for 2026 at a median of 2.2 percent, with a central tendency of 2.0 to 2.3 percent. This was a downward revision of 0.2 percentage points from the March projection of 2.4 percent.

For 2027 and 2028, the FOMC expected growth of 2.3 and 2.2 percent respectively. The long-term growth expectation stands at 2.0 percent. Should actual GDP data differ significantly from projections, this has immediate implications for the Fed's assessment of the economic outlook. Robust growth with declining inflation would strengthen the case for further rate cuts, while economic weakness coupled with persistently high inflation would complicate policy decisions.

Outlook for Upcoming Decisions

The combination of PCE data and GDP figures will form the basis for the next Fed meeting. The September minutes were based on data through August, so October releases will provide new insights. Should Core PCE inflation continue to decline and growth prove stable, the Fed is likely to continue its monetary policy course. A deviation from projections, however, could lead to a reassessment of the rate paths.

Markets will particularly watch whether core inflation confirms its prior downward trend or whether the upward movement observed in mid-October continues. Equally important is whether the GDP figures meet expectations for solid but moderate growth. Together, both data points will determine whether the Fed can maintain its June projection of gradual inflation decline with stable growth.