If the performance of the iShares 20+ Year Treasury Bond ETF (TLT) over the past week is any indication of market expectations, fixed income investors will not be surprised by August's Personal Consumption Expenditures Price Index (PCE).

As of midday trading Wednesday, precisely one week after the Fed announced its 50-basis point rate cut, TLT’s price is 2% lower. This indicates that a big rate cut had already been priced in and that fixed income investors are not expecting PCE inflation to cool more than forecast.

The market expects a 0.1% tick higher for month-over-month inflation in August and 2.3% year-over-year. Inflation readings below these forecasts would push bond prices higher and raise recession fears, while higher numbers would likely result in lower bond prices as inflationary concerns return.

In other words, TLT’s poor performance over the past week suggests that fixed income investors need more evidence from Friday’s PCE report that the worst inflation in 40 years has been vanquished before bond prices can move higher again.

How the Fed, TLT Investors Monitor PCE

Since bond prices have an inverse relationship with interest rates, and the basket of long-term Treasury bonds that TLT tracks are more rate sensitive than shorter-term bonds, TLT shareholders have a keen interest in monitoring the PCE report, which the Fed watches more closely than the Consumer Price Index (CPI).

Here’s what the Fed (and TLT investors) look for in the PCE report:

PCE Price Index (Inflation)

The PCE Price Index measures changes in the prices of goods and services consumed by households, which reflects inflation. The Fed targets a 2% annual inflation rate, so if the core PCE is consistently above or below this target, the Fed may adjust interest rates to cool or stimulate the economy.

Consumer Spending Trends

The PCE report includes data on consumer spending, which accounts for more than two-thirds of U.S. economic activity. The Fed analyzes this to gauge economic health. Strong spending may signal a robust economy, potentially leading to higher inflation, while weak spending may suggest an economic slowdown or recession risks, which could prompt more accommodating monetary policy.

Income Growth

The report tracks personal income and disposable income levels. Rising incomes can indicate economic growth and future inflationary pressure, as consumers have more purchasing power. Declining or stagnant incomes could signal weakness in the labor market or economic activity, influencing the Fed’s decision to maintain or lower rates.