Fed Interest Rate Forecast: PCE Report Nears as 10-Year Yield Remains Above 5%

Author: Muhammad Umair

Updated: September 27, 2026

Key Highlights

• Strong US economic growth keeps the possibility of another Federal Reserve (Fed) rate hike in focus.
• The upcoming August Personal Consumption Expenditures (PCE) report is critical for the Fed's decision-making.
• The US dollar needs to surpass the 101.80 mark to continue its upward momentum.

Economic Indicators

The S&P Global US flash composite Purchasing Managers' Index (PMI) rose to 58.4 in September, indicating robust business activity, up from 56.0 in August. This is the highest reading since July 2021, with companies reporting increased hiring and rising input costs.

In contrast, durable goods orders in the US remained virtually unchanged in August, presenting a mixed picture for the Fed as it weighs strong survey data against less convincing factory orders.

Interest Rate Projections

The Fed's September projections suggest a median policy rate of 4.1% by year-end, indicating the potential for one more quarter-point increase. The two-year Treasury yield was at 4.81%, while the 10-year yield reached 5.17%, reflecting concerns about inflation and borrowing costs.

The Atlanta Fed's GDPNow model estimates a 5.0% annualized real growth for Q3, a significant increase from the 1.5% growth recorded in Q2. If this trend continues, nominal growth could reach double digits.

Inflation and PCE Report

The PCE inflation rate was recorded at 3.7% in July, with core PCE inflation at 3.3%. Households have raised their one-year inflation expectations to 4.6%. The upcoming PCE report on September 30 is crucial for determining the Fed's next steps.

US Dollar Index Analysis

The US dollar index eased to approximately 100.87, despite strong gains in Treasury yields. A strong PCE reading could bolster expectations for another Fed rate hike, supporting the dollar. Conversely, a weaker reading may diminish that case.

The dollar index has been consolidating within a range, needing to break above 101.80 to extend its rally. A failure to do so could lead to a decline towards the 90 level.

USD/JPY and EUR/USD Outlook

The USD/JPY pair is influenced by the interest rate differential between the US and Japan, with the Bank of Japan's recent rate hike to 1.25% providing some support for the yen. A strong US inflation reading could push USD/JPY higher, while a clear signal from the BOJ could lead to a decline.

For EUR/USD, the pair is nearing key support levels. A stronger US PCE report would favor the dollar, while a cooling inflation scenario could allow the euro to recover.

Conclusion

The strong growth in the US economy and persistent inflation keep the Fed's next move in focus. The August PCE report will be pivotal in shaping expectations for future rate hikes. The US dollar's performance against the euro and yen will depend significantly on the upcoming inflation data and its impact on Treasury yields.