Fed Set to Cut Rates Again After Cooler Inflation Report — Evening Brief – 10.24.25 

A softer-than-expected inflation reading for September—delayed by the government shutdown—has strengthened the view that the Federal Reserve will continue its rate-cut cycle at its next two-day meeting on October 28–29, as policymakers try to balance a cooling labor market against still-elevated inflation pressures. 

The U.S. Consumer Price Index (CPI) rose 0.3% in September, slightly below economists’ forecasts of 0.4% and matching a slower pace than August’s 0.4% monthly increase, according to data from the Bureau of Labor Statistics. On a year-over-year basis, headline CPI advanced 3.0%, below the 3.1% consensus estimate but up marginally from August’s 2.9%. 

The core CPI—which strips out volatile food and energy costs and is more closely monitored by the Fed—rose just 0.2% on the month, versus expectations for 0.3% and matching its smallest gain since May. On an annual basis, core CPI cooled to 3.0%, down from 3.1% in August and the lowest level since early 2021. 

Key components reflected continued disinflation in goods, with used-car prices down 1.8%, furniture and household goods slipping 0.5%, and airfares declining 2.3%. In contrast, shelter inflation—the largest component of the index—remained sticky, up 0.4% month-over-month, while services inflation excluding housing and energy edged higher, indicating that underlying price pressures have not fully dissipated. 

With inflation momentum cooling and the labor market losing steam, Fed officials are widely expected to cut the federal funds rate by another 25 basis points, marking the second consecutive reduction. According to the CME FedWatch Tool, markets now assign a 98.9% probability of a rate cut next week and a 98.5% probability of another quarter-point cut at the December meeting, up from 91.1% a day earlier. 

Policymakers face one of their most challenging backdrops in years. The ongoing federal government shutdown has suspended the release of key economic data, including payrolls, retail sales, and industrial production—leaving the FOMC to rely on incomplete information as it calibrates policy. 

Moreover, minutes from the September meeting showed a split among Fed officials: some argue the labor market is weakening enough to justify further easing, while others remain wary that inflation could reaccelerate if policy becomes too accommodative. Despite differing views, most policymakers acknowledge that inflation risks are diminishing and expect a gradual return to the Fed’s 2% target through 2026. However, lingering uncertainties—including tariff policies, fiscal deficits, and the impact of the data blackout—have made it harder to gauge the true state of the economy.