August PCE inflation rose 0.3% on the month and 3.4% from a year earlier, both below forecasts, while July price data were revised lower after a BEA methodology update.
Consumer spending jumped 0.9% in August and 0.6% after inflation, suggesting the economy is still absorbing higher energy costs and recent rate increases.
Fed-rate expectations fell sharply after the data and John Williams' "no urgency" comments, with markets pricing a 34.9% chance of an October hike, down from 51.5% before the report and 70% on Monday.
Markets rallied on the softer inflation print—stocks rose, the dollar slipped and Treasury yields fell—even as another rate increase later this year remained possible.
The report leaves the Fed balancing still-above-target inflation against resilient demand, with spending supported by AI-linked wealth gains, stronger business investment and a lower 4.1% saving rate.