This morning’s “government shutdown edition” CPI release indicated 3.0% annual increases in core and regular CPI (vs 3.1% expected). Month over month, regular CPI rose 0.3% (vs 0.4% expected), while core CPI increased 0.2% (vs 0.3% expected). It’s significant to note that nearly all government economic report releases and compilation have been suspended during the shutdown. The BLS team was called in to complete the September CPI report because it is a critical part of the annual Social Security benefit adjustments. However, if the shutdown continues, no further CPI reports will be issued until the government reopens. Therefore, today’s CPI report release looms large for next week’s Fed meeting. The cooler-than-expected numbers give the Fed ample cover to cut rates, with futures markets indicating a 97% probability of a 25 bp cut at next week’s meeting. 

 The Fed’s “balance of risks” mantra is now leaning toward concern about the labor market. Due to the dearth of statistical information, markets are now watching Fed officials’ statements more closely. Fed President Musalem said he :”could support a path with an additional reduction in the policy rate if there are further risks to the labor market that emerge, and provided that inflation expectations…remain anchored.” Fed President Collins noted,  “With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy…to support the labor market.” Fed Chair Powell added, “The data we got right after the July meeting showed…the labor market has actually softened pretty considerably and puts us in a situation where the two risks are closer to being in balance.” The Fed has basically raised its “inflation pain threshold” to about 3% while focusing on its “maximum employment” mandate. They see more danger in being overly restrictive right now.

The lack of government data (no “jobs, jobs, jobs!” report for Santelli to tout on CNBC) will complicate the process. Private data will be closely watched and parsed. Recent layoff announcements from Meta, Target, GM, and, of course, the Federal Government are adding to the concern. Recently, employers have cut down on new hires but have also been reluctant to lay off workers, perhaps due to the pandemic-era challenges of finding labor. The Fed may be trying to get ahead of that.

What about tariffs?  A recent S&P report indicated total tariff costs of about $1.2 trillion and estimated that roughly one-third of the costs are being borne by companies, with the rest passed on to consumers. The “good news” is that Fed officials believe the tariffs will be a one-time hit to prices rather than a continuing source of underlying inflation pressure. What about the 10-year Treasury?  It seems the next rate cut has been priced in, as it is trading right at 4.00% in a tight range this week. Treasury rates are also affected by other factors, such as supply issues. This week the U.S. debt surged past $38 trillion after hitting $37 trillion in August, marking the fastest $1 trillion increase in a non-pandemic period. Stay tuned…

By David R. Pascale, Jr., Senior Director