Markets are preparing for a rare event — the release of the Consumer Price Index (CPI) on Friday, for the first time since 2018. The report will be published during a government shutdown, which has frozen the release of most economic data and left the Federal Reserve without its usual benchmarks ahead of the October 29 meeting.
One report decides everything
Due to the suspension of federal agencies, data on employment, retail sales, and industry will not be published. The CPI remains the only fresh indicator the Fed can rely on when deciding whether to cut rates.
“The situation is unusual — the CPI comes out just five days before the Fed meeting,” noted analyst Adam Kobeissi.
Traditionally, inflation reports are published on Tuesday or Wednesday to give the regulator time to analyze the numbers. However, this time the Bureau of Labor Statistics (BLS) moved the release to Friday due to disruptions caused by the shutdown. The last similar case occurred more than six years ago — in January 2018.
CPI becomes a key market indicator
This timing coincidence has sharply increased attention to inflation data. According to MarketWatch forecasts, consumer prices continued to rise in September, but more slowly than in August, which may signal easing inflationary pressure.
Currently, interest rate futures estimate the probability of a Fed rate cut by 0.25 percentage points at almost 99%, but a weak CPI may push the regulator to a more aggressive move — a cut of 0.5 percentage points.
“If inflation turns out to be softer than expected, pressure on the Fed will increase, and the market may get a double cut,” one analyst told CNBC.
Dilemma for the Fed
On the one hand, soft inflation gives the Fed room for further easing. On the other hand, the shutdown complicates the analysis of the real state of the economy. Without up-to-date data on employment and consumer spending, the Fed risks making a decision in an information vacuum.
Some representatives of the regulator have already expressed concern about the slowdown in the labor market and declining business activity. These are arguments in favor of policy easing. However, if the CPI turns out higher than expected, the balance of power will change — the Fed will have to choose between fighting inflation and risking a slowdown in economic growth.
Investors prepare for volatility
Bond and derivatives markets are pricing in the likelihood of volatile moves in the coming days. A situation where all attention is focused on a single macro report is extremely rare for investors.
Friday’s CPI release may determine not only the Fed’s decision at the October meeting, but also the entire trend of monetary policy for the fourth quarter. If the data confirm cooling inflation, the market will get a signal for the start of a new easing cycle. If inflation remains persistent, expectations of a sharp rate cut will have to be revised.
What’s next?
The next Fed meeting will be held on October 29. Until then, the regulator will have no new data, and the September CPI will effectively be the only basis for the decision.
Thus, a single Friday report could change the trajectory of rates in the world’s largest economy — from a soft landing to a new round of monetary risk.
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