Fed Holds, PCE Heats Up: December Hike Comes Into View
In 48 hours, the Federal Reserve got the two things it said it was waiting for: its own decision, and the data to judge it. On Wednesday, October 28, the Federal Open Market Committee (FOMC) held its target range at 3.75% to 4.00%, with two officials dissenting in favour of a hike. On Thursday, October 29, the Bureau of Economic Analysis (BEA) reported third-quarter growth of 3.4% at an annual rate, while the Fed’s preferred inflation gauge accelerated to 3.6% in September. The December 8-9 meeting is now the live question.
Together the releases sharpen the argument: growth looks strong enough to withstand higher rates, while inflation is moving away from the Fed’s 2% goal. That is the hawkish case. The counter-case is that quarterly inflation cooled sharply, and one energy-heavy month should not override it.
A hawkish hold, then hot data
The decision itself was widely expected. The Fed had raised its range by a quarter point in September, its first increase since 2023. Chair Kevin Warsh said the pause would let September’s tightening work through financial and credit conditions while an unusually dense run of data arrived. The statement, approved 10-2, upgraded activity from “solid” to “expanding at a strong pace,” repeated that inflation “remains elevated,” and said more information would help the Committee judge the stance needed to return inflation to 2% in a timely way.
The dissents were the news inside the decision. Governor Lisa Cook and Cleveland Fed President Beth Hammack both preferred to raise the range by a quarter point at this meeting, to 4.00%-4.25%. Both dissents pointed the same way — tighter, not easier. Dissents do not decide the next meeting, but a hawkish split is often read as a signal of where the committee’s centre of gravity is moving. Warsh declined to commit on December and said he did not favour forward guidance outside exceptional circumstances. The implementation note left administered rates unchanged: interest on reserve balances at 3.90% and the primary credit rate at 4.00%.
Thursday’s data then reframed the pause. The BEA’s advance estimate put third-quarter real GDP growth at 3.4% at an annual rate, up from 2.2% in the second quarter and above the consensus of around 3.1% reported beforehand. Investment, consumer spending and government spending all contributed, partly offset by a fall in exports, while imports rose. This is an advance estimate; the second estimate follows on November 25.
At the same time, September’s personal income and outlays report showed inflation re-accelerating. The PCE price index rose 0.5% in the month, lifting the 12-month rate to 3.6% from 3.4% in August. Core PCE rose 0.3% on the month and 3.1% over the year, up from 3.0%. September CPI, released October 14, was similar: headline 3.7%, core 2.6% over the year (see our CPI vs PCE explainer: https://macrometer.xyz/cpi-vs-pce-inflation-difference/).
| The 48-hour scoreboard | Reading | Previous |
|---|---|---|
| Fed funds target range (Oct 28) | 3.75%-4.00%, held | 3.75%-4.00% (set Sep 16) |
| FOMC vote | 10-2; Cook, Hammack preferred a hike | 12-0 to hike in September |
| Q3 real GDP, advance (Oct 29) | +3.4% annual rate | +2.2% in Q2 |
| Real final sales to private domestic purchasers | +4.9% | +4.6% in Q2 |
| September PCE inflation, year on year | 3.6% | 3.4% in August |
| September core PCE, year on year | 3.1% | 3.0% in August |
Sources: Federal Reserve, October 28, 2026; BEA, October 29, 2026. Compiled by Macrometer.
Two inflation readings, one uncomfortable story
Thursday’s data contain two apparently opposite inflation stories, and both are true — they measure different windows. The GDP report’s price measures are quarter-on-quarter annualised rates: the PCE price index rose at a 2.1% annual rate in the third quarter, down from 5.0% in the second, and core PCE at 2.5%, down from 3.3%. But the monthly report measures September against a year earlier: 3.6% headline, 3.1% core, both higher than August. The quarterly average is flattered by a quieter June and July; the monthly series shows where the quarter ended.
That distinction is the debate in miniature. The “wait” camp can argue the September monthly jump was energy-led — a relative price change that need not broaden. The “hike” camp can point to the year-on-year series, the Fed’s yardstick for its 2% goal, and note both headline and core moved the wrong way. A Macrometer calculation frames the distance left: headline PCE at 3.6% sits 1.6 percentage points above target; core at 3.1% sits 1.1 points above.
The household squeeze behind the headline
Growth flatters household finances less than it appears. Nominal spending rose 0.5% in September, but prices rose 0.5% too, so real spending was essentially flat — the BEA put real PCE growth at less than 0.1%. Real disposable personal income fell 0.3%, as nominal income growth of 0.2% failed to keep pace with prices. The saving rate stood at 3.8%.
The squeeze cuts both ways: higher rates are already biting, yet demand is not collapsing.
The case for a hike, and the case to wait
The case for December rests on three facts now on the record. Inflation is above target on every major gauge — CPI 3.7%, PCE 3.6%, core PCE 3.1% — and rising on the year-on-year measures. Growth is strong, at 3.4%, giving the committee room to act without an obvious recession risk. And two of twelve voters already wanted a hike in October, while September’s projections implied one more increase this year. CME FedWatch pricing reported by Reuters on Thursday put the chance of a December hike at roughly 85% — a snapshot of bets, not a promise.
The case to wait is narrower but not weak. Quarterly inflation cooled a great deal, the September jump was energy-led, and the Fed has had only six weeks to observe its September hike. December carries a new Summary of Economic Projections, so the committee can hike with a fresh forecast behind it, or hold. The dissents were only two votes; the other ten chose patience, and nothing in Thursday’s data forces a reversal.
What would change the balance? Hawkish: October CPI and PCE readings that stay hot, or evidence that September’s price jump is broadening into services. Dovish: cooling October inflation or a softening labour market. For background, see our guide to how the Fed sets interest rates: https://macrometer.xyz/how-fed-sets-interest-rates-guide/ and our preview of the October FOMC meeting: https://macrometer.xyz/fed-october-meeting-hold-expected/
What to watch next
The minutes of the October meeting, due in mid-November, will show how the hold was argued. On November 25, the BEA publishes the second GDP estimate alongside October’s income and outlays report. October CPI, due in November, will show whether September’s acceleration persisted. Then, on December 8-9, the FOMC meets with new projections. The October hold bought six weeks of data; Thursday’s data spent the first instalment arguing against patience. This article is analysis of public data and statements, not financial advice.
Sources: BEA GDP release: https://www.bea.gov/news/2026/gdp-advance-estimate-3rd-quarter-2026 ; BEA PCE release: https://www.bea.gov/news/2026/personal-income-and-outlays-september-2026
