Stocks Reach New Highs After CPI Data Signals Green Light for Fed Cuts

Wall Street kicked off a relief rally after cooler-than-expected inflation data reinforced investor confidence that the Federal Reserve will continue cutting interest rates. Stocks extended their October gains, with the S&P 500 climbing to new record highs on optimism that easier monetary policy will sustain corporate profit growth. An early surge in Treasury prices faded later in the session as strong manufacturing and services readings underscored the resilience of the U.S. economy.

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Traders welcomed the slowest pace of core inflation in three months, especially after weeks of limited data due to the ongoing government shutdown. The September core Consumer Price Index (CPI) rose just 0.2% from August and 3% year over year signs that inflationary pressures are easing. While markets were already anticipating a rate cut at next week’s Fed meeting, this soft report likely strengthens the case for another move in December. According to Goldman Sachs Asset Management’s Lindsay Rosner, the CPI data offered “nothing to spook the Fed.”

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“Investors are charging ahead after this morning’s mild CPI numbers strengthened expectations for a string of rate cuts this year and next,” said Jose Torres of Interactive Brokers. The White House, however, noted that due to the ongoing shutdown, October’s inflation data will likely not be released.

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The S&P 500 advanced nearly 1%, briefly surpassing the 6,800 level. Two-year Treasury yields dipped one basis point to 3.48%, while the dollar fluctuated modestly.

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According to Jason Pride at Glenmede, as long as incoming data shows more risk to jobs than to inflation, the Fed will likely maintain a path of policy easing. Art Hogan of B. Riley Wealth added that the central bank remains committed to its full-employment mandate, even if inflation remains slightly above target. Morgan Stanley’s Ellen Zentner echoed that sentiment, saying the CPI aligns with private data trends showing no signs of runaway inflation or a collapsing labor market.

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“For a Fed focused on prudent risk management, this should translate into another rate cut next week and likely more in the months ahead,” Zentner said. Bret Kenwell at eToro agreed, noting it would have taken an extremely hot report to derail expectations for an October cut.

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“At a time when economic data is limited, investors will take any clarity they can get,” he said. Kenwell also emphasized that while two more rate cuts this year are possible, the Fed will find it difficult to justify a more aggressive stance unless the labor market weakens significantly. “Still, equities can perform well in a mild inflationary backdrop, as we’ve seen recently. Continued earnings strength is key, and so far this season, results have been solid,” he added.

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Chris Zaccarelli of Northlight Asset Management compared the inflation picture to a Sherlock Holmes mystery, calling it “the dog that didn’t bark.” Many investors positioned for a surge in inflation, he said, but the economy and corporate earnings continue to prove more resilient than anticipated.

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While he acknowledged elevated valuations and ongoing risks, Zaccarelli said the combination of rate cuts and profit growth makes it difficult to bet against the current bull market. “Next year may bring new challenges,” he said, “but standing in the way of this year’s rally seems unwise.”

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Citadel Securities’ Scott Rubner expects a potent mix of seasonal strength, corporate buybacks, and retail investor demand to fuel a powerful year-end surge. “The most favorable seasonal window of the year begins next week,” Rubner wrote, adding that persistent retail buying remains a key force in equity pricing.

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Interest-rate swaps now reflect nearly full expectations of quarter-point rate cuts at the Fed’s upcoming meetings in October and December. BMO Capital Markets’ Ian Lyngen said the inflation data all but guarantees next week’s 25-basis-point cut, likely delivered with a dovish tone.

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TD Securities strategists Oscar Munoz and Gennadiy Goldberg agreed, saying the CPI numbers “lock in” both cuts, though they expect further bullish momentum in bonds to be limited since much of this outlook is already priced in. Markets are also turning their attention to potential guidance on future easing and an end to the Fed’s balance-sheet reduction, which TD expects could be announced as early as this month.

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At JPMorgan, economist Michael Feroli said he anticipates the Fed will halt its quantitative tightening (QT) program next week, citing mounting signs of stress in money markets. He also noted that even the Fed’s more hawkish members haven’t pushed back against expectations for a rate cut, reinforcing market confidence. Feroli expects Chair Jerome Powell to describe the move as part of a broader “risk management” strategy while avoiding firm guidance on December policy decisions.

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Traders are now betting on about 120 basis points of total easing over the next year, which would bring rates down to roughly 2.9% below the so-called neutral level of 3%. Florian Ielpo of Lombard Odier Asset Management said the data confirms that while inflation remains sticky, it’s steadily moderating, supporting the case for multiple rate cuts in 2025. ClearBridge Investments’ Josh Jamner added that while tariffs have nudged up prices in select goods like apparel and furniture, overall inflation remains subdued, leaving room for the Fed to act. LPL Financial’s Jeffrey Roach predicted inflation could improve further by December, setting the stage for continued easing into 2026.

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“In general, inflation is staying well contained,” said Eric Teal of Comerica Wealth Management. “The combination of softer job data and controlled prices gives the Fed cover to cut rates through 2025 and into next year.”

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According to Tiffany Wilding of PIMCO, competitive pressures in retail are helping limit the pass-through of higher tariffs, keeping overall inflation modest. Strategas’ Don Rissmiller added that inflation expectations remain well anchored, reducing fears of runaway price growth. Global X’s Scott Helfstein concluded that while the delayed CPI report wasn’t great, it certainly wasn’t bad enough to stop the Fed’s easing cycle. “Yes, prices are up, but not enough to derail growth. Consumers may grumble about higher costs but they’re still eating out,” he said.

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Meanwhile, separate data showed consumer sentiment slipped in October to a five-month low, with households still wary about prices and personal finances. “Today’s figures support the Fed’s view that inflation is gradually moving in the right direction,” said John Kerschner of Janus Henderson. “For now, markets are giving the Fed the green light to keep cutting rates through 2025.”

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