Baker Market Update 2025-10-24

As we close out just over three weeks of the government shutdown, markets continue to steer through muddy waters with limited new data. Fed policymakers are also in a required quiet period ahead of next week’s pivotal policy meeting, leaving little new information to digest this week. The one notable exception was the release of this morning's September Consumer Price Index (CPI). Furloughed Bureau of Labor Statistics (BLS) workers were called back in to calculate September CPI in order to determine the 2026 Cost of Living Adjustments (COLA) necessary for Social Security benefits.

This morning’s numbers showed that inflation increased slightly less than expected in September, rising 0.3% after climbing 0.4% in August. On an annual basis, CPI increased 3.0% after advancing 2.9% in August. Excluding the volatile food and energy components, Core CPI rose 0.2% month-over-month and 3.0% year-over-year. That marks the slowest monthly increase in the core measure in three months.

This report is welcome news for Fed policymakers who meet next week to decide a near-term rate path, especially for those who have been leery of cutting rates further. The central bank is widely expected to reduce the policy rate by a quarter point next week to a range of 3.75% to 4.00%, marking the lowest level since December 2022. However, the lack of new data may complicate the Fed’s path in subsequent meetings.

This morning’s softer than expected inflation data has investors betting it will be enough to convince Fed officials they can cut again in December, especially if there is no October CPI report released next month. Data collection for September CPI was completed before the government shutdown, but the BLS has not been able to collect new price data since. This morning, a White House-affiliated X account said, “there will likely NOT be an inflation release next month for the first time in history.” That means this could be the last look at inflation data for the Fed’s next two meetings.

Futures markets are currently assigning a ~97% probability of an October cut and a ~96% chance of a December cut. Next week, markets will undoubtedly be paying close attention to the Fed’s rate decision but likely much more so to the tone of the accompanying statement and Chairman Powell’s press conference that follows. Investors will be parsing every word for clues about whether this is the start of a sustained cutting cycle or if the committee remains hesitant to make significant changes to its policy stance amid limited data.

Have a great weekend!