Stocks Surge to New Highs After Soft CPI Clears Path for Fed Rate Cuts

Wall Street wrapped up the week on a high note after cooler-than-expected inflation data strengthened expectations that the Federal Reserve will continue cutting interest rates. Stocks extended their October rally, with the S&P 500 reaching fresh record highs as investors bet that easier monetary policy will keep fueling corporate profits.

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Treasury yields initially dropped before paring back some of the decline, as new manufacturing and services reports highlighted ongoing resilience in the U.S. economy.

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The September consumer price index (CPI) revealed the slowest pace of core inflation in three months a welcome development for traders who’ve been navigating limited data due to the ongoing government shutdown. Core CPI rose 0.2% from August and 3% year over year.

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The softer reading, analysts say, clears the path for more rate cuts ahead. While the Fed was already expected to lower rates next week, the data gives policymakers confidence that another reduction in December could follow. “There’s nothing in this report that would rattle the Fed,” said Lindsay Rosner of Goldman Sachs Asset Management.

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Jose Torres at Interactive Brokers added, “Investors are taking charge after this lighter CPI print bolstered the case for multiple rate cuts this year and into next.”

The White House later confirmed that due to the shutdown, October inflation data will likely be delayed.

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The S&P 500 climbed nearly 1%, briefly surpassing 6,800, while the two-year Treasury yield eased to 3.48%. The dollar fluctuated as markets adjusted to shifting policy expectations.

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Many strategists believe the Fed will remain focused on protecting jobs rather than fighting lingering inflation pressures. Jason Pride at Glenmede said that as long as data shows greater risk to employment than inflation, the central bank’s path points toward continued easing.

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Art Hogan of B. Riley Wealth agreed, noting that the Fed has made clear its priority is full employment, even with inflation still above its 2% target.

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Ellen Zentner at Morgan Stanley added that the CPI report reinforces what private data have shown during the shutdown: inflation is cooling and the labor market, while softening, remains intact. “For a Fed focused on prudent risk management, that likely means another cut next week and probably more after that,” she said.

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Bret Kenwell at eToro commented that only a surprisingly bad inflation reading could have derailed an October cut. “Investors will take any clarity they can get right now,” he said. While Kenwell expects possibly two more cuts this year, he added that a more aggressive pace is unlikely unless labor conditions deteriorate significantly.

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“Stocks tend to perform well in a mild inflation environment,” Kenwell said. “We’ve seen that over the past few years and for that to continue, earnings will need to stay strong. So far, they have.” Chris Zaccarelli at Northlight Asset Management put it succinctly: “Inflation is the dog that didn’t bark.” He noted that many had bet on surging inflation and positioned bearishly, but the market’s strength suggests investors underestimated the resilience of both the economy and corporate America.

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Zaccarelli added that while valuations are high and risks remain, steady profits and Fed rate cuts make it difficult to argue against the current bull market. “Next year may bring new challenges, but for now, we wouldn’t bet against this rally,” he said.

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Scott Rubner of Citadel Securities said U.S. stocks may be entering their most favorable stretch of the year. “The best seasonal window begins next week,” he wrote, citing rising retail investor demand and a wave of corporate buybacks as catalysts for a strong year-end rally.

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Interest-rate swaps now show traders nearly fully pricing in quarter-point cuts at the Fed’s upcoming meetings in October and December. Ian Lyngen of BMO Capital Markets said the CPI figures effectively confirm a 25-basis-point “dovish” cut next week, with another likely to follow.

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TD Securities strategists Oscar Munoz and Gennadiy Goldberg agreed, saying the October cut “is a done deal,” though much of the bullish momentum is already priced in. Markets will now focus on signals about when the Fed plans to end its balance sheet reduction, also known as quantitative tightening (QT).

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Money markets have been warning that QT might be nearing its end as liquidity strains build. JPMorgan’s Michael Feroli expects the Fed to announce an end to QT at its next meeting. He also predicts the post-meeting statement will largely mirror September’s, with Chair Jerome Powell framing the move as a “risk management” step.

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Traders are currently pricing in around 120 basis points of easing over the next year, taking rates to about 2.9% just below the neutral level that neither stimulates nor restrains growth.

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Florian Ielpo of Lombard Odier Asset Management said the data confirms that inflation remains sticky but is gradually fading, strengthening the case for more rate cuts through next year.

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Josh Jamner at ClearBridge Investments added that while tariffs have lifted prices in select sectors like apparel and furniture, overall goods inflation slowed in September, suggesting limited pass-through to consumers.

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Similarly, LPL Financial’s Jeffrey Roach expects inflation pressures to ease further by December, giving the Fed room to continue cutting into 2026.

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Eric Teal at Comerica Wealth Management agreed: “Inflation remains under control, and with the labor market cooling, the Fed has cover for additional rate cuts next year.”

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Analysts broadly agree that inflation remains subdued, with competitive pricing and supply chain improvements keeping costs contained. “Inflation expectations are well-anchored, so we’re not worried about runaway prices,” said Don Rissmiller of Strategas.

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Even though prices have risen modestly in certain categories, Scott Helfstein of Global X said they’re not high enough to halt the Fed’s easing path. “Yes, prices are higher, but not by enough to derail growth,” he said.

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As John Kerschner of Janus Henderson summed up: “Today’s numbers help validate the Fed’s view that inflation is moving in the right direction and markets are comfortable giving the Fed room to keep cutting through 2025.”

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