Baker Market Update 2026-10-16

We are only three weeks into the fourth and final quarter of 2026, and exactly one month has passed since the Federal Reserve unanimously voted to raise the target range for the federal funds rate by 25bps to 3.75%-4.00%, in an effort to bring recent inflationary pressures back toward the Fed’s 2% target. Against the backdrop of a monetary policy shift from accommodative to restrictive, and with a busy slate of economic and market events this week, the third week of the quarter was anything but uneventful.

On Wednesday the 14th, the Consumer Price Index (CPI) gave us a closer look at how consumer prices changed in September. Both headline and core CPI (which strips out food and energy) came in either in line with or above expectations on a monthly and yearly basis. The biggest surprise was core CPI, which rose 2.6% year over year, 0.1 percentage point above analyst expectations and 0.2 percentage points above the prior reading.

On the same day as the CPI reports, the Federal Reserve System released commentary regarding current economic conditions in each of the 12 Federal Reserve districts. This report is commonly referred to as the Beige Book. Although much of the material in the report is anecdotal, the most recent report gives good insight into how prices and rates have impacted consumer demand and financial welfare. Contacts across several Districts described lower income households trading down, delaying purchases, and leaning on credit to make ends meet. One San Francisco contact noted that these pressures are now starting to spread into middle-income families as well. The report also mentions that rates have yet to cause a broad pullback in borrowing, but they continue to weigh on housing and auto demand and, along with geopolitical and inflation concerns, have left bankers in several Districts noticeably more cautious.

Treasuries rallied this week as markets grew more cautious about the economic outlook. With higher costs and interest rates raising questions about consumer demand and the Fed’s next steps, the 10-year yield declined from 5.25% to 5.10% over the holiday-shortened week. Equity markets felt the same pressure, with broad declines across U.S. and global indices.

Despite both rising price levels and interest rates, retail sales managed to tick up in the month of September. Retail sales on a month-over-month basis beat consensus estimates by 0.5 percentage points, increasing by 0.8% during the month of September.

Have a good weekend everyone!