The latest inflation data closely watched by the Federal Reserve has been released, and it came in line with expectations, giving policymakers more room to hold interest rates steady.

On Wednesday evening, fresh figures showed that U.S. consumer spending stalled in July, while a key inflation measure rose as anticipated. The Commerce Department reported that the personal consumption expenditures (PCE) price index increased 0.2% month over month in July, translating to an annual inflation rate of 3.7%.

Both the monthly and yearly readings for the PCE index, the Fed's preferred inflation gauge, came in 0.1 percentage points higher than the expectations gathered in a Dow Jones survey. However, when stripping out the more volatile food and energy components, the core PCE rose 0.2% on a monthly basis and 3.3% annually, both matching market forecasts.

This batch of data suggests that the U.S. economy cooled in July following a strong stretch of consumer activity in early summer. At the same time, the report is likely to reinforce the argument within the Fed for keeping interest rates unchanged, as officials look for more signs that inflationary pressures, partly fueled by geopolitical tensions, are starting to ease.

Investors are now turning their attention to Fed Chair Kevin Warsh's upcoming speech at the annual central bank symposium in Jackson Hole, Wyoming, on Friday. They are hoping for more clarity on how the Fed plans to navigate monetary policy while inflation remains stubbornly above its 2% target.

Adding to the picture, a separate report released on Wednesday showed that the U.S. economy grew in the second quarter at the same pace as initially estimated, although consumer spending actually proved stronger than previously thought when looking at the breakdown of the data.

Following the release of these figures, market pricing indicated a slight uptick in the odds of a rate hike next month. Interest rate futures showed that the probability of a September rate increase climbed to roughly 42%, up from around 36% before the data came out. Markets now see the most likely timing for a potential rate hike this year as December.

In response to the data, the U.S. dollar index strengthened, while Treasury yields moved higher. Meanwhile, U.S. stock futures were trading lower in pre-market activity, and gold prices took a sharp dive.