On Friday, despite the continued Federal government shutdown, the Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for September 2025. Although the report was over a week past due, it was “better late than never.” Perhaps the BLS will figure out a faster way to get us the labor data next month.
A boy can dream, can’t he?
As for the report, what can I tell you? It was slightly better than expected. According to the BLS report, consumer prices were only up 0.2% this past month, in aggregate. As a result, over the last 12-months ending in September 2025, the CPI is 3.0%.
That is higher than the Fed might like for it to be. However, the inflation gauges seem to be finding a comfortable home around that 3.0% level, give or take a one-tenth or two. Historically, that is arguably close-enough-to-average for government work, which, interestingly enough, is what calculating the inflation rate is.
Now, let me ask you a question: can you live with an official inflation rate of 3.0%? Of course, this assumes a reasonably accurate calculation.
That is sort of a trick question. Of course you can. Broadly speaking, if your income increases by at least the same amount as inflation, you will maintain your purchasing power, and you can live with inflation growing at any level. Further, the economy can deal with a heightened level of inflation as long as the markets can set interest rates to reflect the true level of price increases.
Unfortunately, most of the worst cases of “hyperinflation” in history seem to have happened when the governing authorities botched things up one way or the other. Essentially, they make a bad situation worse. I suppose the public’s cries to to “do something” are just too strong for the average politician to ignore.
The monetary policy making arm of the Federal Reserve, the Federal Open Market Committee (FOMC), is due to meet on October 28th and 29th.
If the Fed Funds futures markets on the Chicago Mercantile Exchange are accurate, there is a very high likelihood the FOMC will cut the target overnight lending rate (Fed Funds) another 25 basis points (0.2%) to 4.00%.
Currently, it is 4.25%.
Obviously, that should make money in the financial system a little bit less expensive. If so, won’t that be somewhat inflationary? And why would the Fed do something so silly when the official inflation gauges are already higher than they would like? I mean, throwing inflation on top of inflation doesn’t seem like a bright thing to do.
So, are the Feds just giving the masses what they want, cheaper money? And hasn’t government tomfoolery been the source of some of the worst periods of inflation in history? Are we at the brink of another surge in consumer prices?
Well, no one can look into the future with crystal clarity. However, whatever the FOMC does or doesn’t do next week likely won’t be the cause of, well, much of anything substantial.
According to my handy-dandy Bloomberg terminal on my desk, the average month-end Fed Funds rate from September 1982 to September 2025 was 3.83%. That link is to the St. Louis Fed if you must see the rates. Over that time, the 12-month CPI has averaged 2.87%. As such, the difference between the overnight rate and inflation has been around 100 basis points for the past 40+ years.
As I have established earlier in this note, the spread is currently around 125 basis points or 1.25%. As a result, assuming the CPI stays at or near the 3.0% level, the next 25 basis point cut, potentially as early as next week, will take the Fed Funds rate to about its historical average, relative to inflation.
In other words, the next rate cut will take it to essentially neutral at current levels. Based on my spreadsheet work with the data from Bloomberg, that should keep inflation roughly where it currently is. In the short term, we likely won’t see either vast improvement or deterioration in inflation, absent something extraneous happening.
Of course, I am supposed to write that “past performance is not necessarily indicative of future results.” That is a completely accurate statement. However, I am simply relaying what has been done previously, and the past tends to repeat itself more frequently than we would care to admit.
How else could you explain the unusually high number of first dates I had when I was a single man?
Now, IF you were to push me on how much I believe the Fed can cut the Fed Funds rate without causing a spike in prices, I would tell you there really isn’t a great answer due to the other arrows it has in its quiver. It could cut the overnight rate and shrink its balance sheet at the same time. Or it could increase reserve and capital requirements.
However, I suspect if you were somehow able to wring the truth out of them, the average FOMC member would probably start sweating about 50 basis points higher than whatever the 12-month inflation number happens to be at the time. Essentially, inflation plus 50 basis points. As I type, that would mean a Fed Funds rate of 3.50% would be the current floor.
That is simply my opinion, and my opinion only. However, that is also what my position would be if I were on the FOMC. In fact, in the past, I have told groups to whom I have spoken that I would be in favor of a formula for the Fed Funds rate. Depending on market conditions, it would be inflation plus 50-150 basis points.
But that wouldn’t be very politically popular or academically challenging. In fact, it would put a whole bunch of “Fed watchers” and other pundits out of work. Further, it would eliminate the need for a lot of folks at the Fed. So, I suppose it would never happen.
Again, a boy can dream, can’t he?
In the end, last Friday, the BLS released the CPI for September 2025. It was a benign enough report to keep expectations for another rate cut on the front burner. We shall see. However, as long as inflation doesn’t start to accelerate from this point, I believe the Fed is more inclined to cut rates than increase them.
So does pretty much everyone else.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
Chief Economist /Chief Investment Officer, Oakworth Asset Management
Please note, this newsletter is for informational and educational purposes and the commentary should not be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates of Oakworth Asset Management, Oakworth Capital Bank or the official position of the company itself.
Opinions and forward-looking statements are subject to change without notice and may not come to pass. Past performance is not indicative of future results. Sources: Bureau of Labor Statistics, Federal Reserve, Bloomberg, and Chicago Mercantile Exchange.