Market Minute: October 24, 2025 - The Fed's Next Move

We have been closely watching the Fed and its pronouncements because we see a tug-of-war between inflation and employment. As we have written many times, the Fed has a dual mandate: preserving low inflation and maintaining full employment. Many have argued that the Fed was late raising rates due to its early, erroneous belief that the current bout of inflation would be temporary. Shanked that one! In response, the Fed aggressively increased interest rates to try to stall inflation. Once the employment market began to look a little wobbly, calls to cut rates grew louder, aimed at forestalling a potential recession.

What’s Different Now?

As analysts, we constantly ask the question of what is different now. Most of the time, the answer is “not much”. The wrinkle in the current employment market is the impact of artificial intelligence and how that influences hiring managers’ forward-looking decisions on adding staff.

Latest Inflation Data

We have learned that the Labor Department reported the Consumer Price Index (CPI) rose 0.3% in September, bringing the annual inflation rate to 3.0%. These two figures are slightly lower than the consensus forecast, which predicted a 0.4% monthly increase and a 3.1% annual rate. When food and energy are factored out, inflation rose 0.2% for the month and rose 3.0% for the year. Oil prices have trended lower this year as U.S. production ramped up, offsetting geopolitical tensions that might have otherwise pushed prices higher.

Fed Rate Outlook

Our current thinking is that these muted inflation figures will give the Fed the cover it needs to cut rates at its next meeting. We are not expecting a significant reduction, but rather a 0.25% reduction in the Fed Funds rate. The reason for our current thinking is that while inflation is muted, it is still considerably higher than the desired Fed target of 2.0%. While inflation is muted, it remains above the Fed’s target of 2.0%. A 0.5% cut is possible, but we see it as less likely.

Market Implications

The easing of inflation has had a positive impact on stock prices, as market participants anticipate that interest rates will continue to decline. On the virtuous side, if inflation declines and it spurs housing and other economic activity, it could provide a boost to both the broader economy and the stock market. However, if the employment market continues to weaken, we could see a deceleration in aggregate spending, and this would be negative for both markets and the economy.

While one report does not solidify a trend, inflation does appear to be slowing. The critical question now is how the economy behaves moving forward.