A wide range of economists say the Federal Reserve now has the green light to cut interest rates, following a cooler-than-expected inflation report that suggests price pressures are easing — and that monetary policy can shift focus toward the softening labor market.
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September's Consumer Price Index showed headline inflation edging up to 3% year-over-year, but crucially slightly below the 3.1% forecast.
Core inflation, which strips out food and energy, slowed from 3.1% to 3%, with a monthly increase of just 0.2%, also below expectations.
The Green Light For The Fed To Cut
Adam Turnquist, chief technical strategist at LPL Financial, said the inflation data removes a major hurdle for the Fed and confirms that disinflation remains on track.
"This is the green light for the Fed if they needed further evidence for a rate cut," Turnquist said.
Markets are currently pricing in two additional rate cuts by year-end, followed by three more in 2026.
However, Turnquist pointed to a growing disconnect between investor expectations and the Fed's own guidance. The Fed's September dot plot indicated just two more cuts in 2025 and possibly one in 2026 — a gap that, according to Turnquist, could become a source of market volatility.
Economist Mohamed El-Erian said Friday's CPI report "makes a Federal Reserve rate cut next week highly probable," adding that future moves will depend on confirmation of a weakening labor market and continued disinflation in the months ahead.
Jeffrey Roach, chief economist at LPL Financial, said tariffs likely contributed to higher apparel prices in September, but broader inflation dynamics are improving.
"Inflation metrics will likely improve by December," Roach said, "setting the Fed up to continue easing throughout 2026."
Heather Long, chief economist at Navy Federal Credit Union, said the rise in CPI was mostly due to higher gas and food prices, with some tariff impact visible.
But core CPI came in cooler, and "should help the Fed focus on ensuring the labor market doesn't get any worse."
Bill Adams, chief economist for Comerica Bank, said September's inflation undershoot was primarily due to housing-related disinflation, with home prices and rents continuing to rise more slowly than wages.
That trend helped contain shelter costs and offset inflationary pressure from tariffs and labor shortages. Used vehicle prices also declined, which Adams linked to weakened demand among lower-income consumers.
Despite the overall cooling, Adams warned that certain categories are still experiencing double-digit price increases, many of which reflect structural issues tied to labor shortages and supply disruptions.
He highlighted coffee prices, which are up 19% year-over-year, and motor vehicle repairs and home healthcare services, both of which are up 12%. Gardening and landscaping costs climbed 14%, while beef prices surged 15% due to ongoing drought conditions and reduced cattle herds.
The Labor Market, Not Inflation, Now Takes The Driver’s Seat
Economists note that the shift in the Fed’s focus may already be underway.
Richard Potts of Bondford said Friday's downside surprise reinforces the view that the inflationary impact of Trump-era tariffs has been overstated.
He indicates this gives the Fed "renewed scope to focus on the other half of its dual mandate — the labor market."
"Even in the absence of official data," Potts said, "private-sector surveys and the Fed's own analysis suggest the jobs market is still deteriorating, raising the stakes for policymakers."
Shutdown Threatens Key Data Ahead
Bank of America economist Stephen Juneau warned that the ongoing government shutdown could create a significant data gap in October.
"That means the Fed may not have a good read on inflation for its next meeting on December 9-10," he said.
Bank of America's read-through from the CPI to the Fed's preferred Personal Consumption Expenditures index suggests that underlying inflation remains moderately — but not dangerously — above target, which should keep the central bank focused on the labor market in the near term.
"In the absence of the September jobs report, an October cut appears to be a done deal," Juneau added.
While the bank isn't formally forecasting a December cut yet, he said the Fed will be inclined to act again if job market data remains unavailable by the December meeting.
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