Softer labor data and cooler inflation figures allowed the Fed to cut in October, but timing of the next move is less certain.
Regardless of a deal to end it, the government shutdown is the longest on record and is causing a logjam in the real economy. For instance, by the time these items are restarted, the shutdown will have delayed for essentially two months, federal workers’ paychecks and the release of key economic data—from retail and new home sales to trade data and wholesale prices. In the case of consumers, there’s a real impact in the direct delay of incomes, but also an indirect loss of income for private service sector workers that depend on the spending of those federal employees, such as restaurants, hairdressers, dry cleaners, etc.
In the interim, privately sourced economic data has been the stand-in that’s provided a window into the economy during the shutdown. Although the Federal Reserve (Fed) made a quarter-point rate cut (0.25%) in October after signs of a softer labor market and easing inflation, recent public comments suggest the Fed will likely wait for a more complete economic picture from its usual data sources before deciding on the next move.
Controlling inflation is a key Fed policy priority, after inflation-driven price spikes over the past few years and in anticipation of tariff effects on imported goods price levels. The September Consumer Price Index (CPI) report showed that inflation had cooled compared to August. The biggest price reductions in September were in food, vehicles, and auto insurance, which more than offset increases in energy and apparel. Still, the report showed signs of upward price pressure, particularly in import-dominated categories: apparel jumped 0.7%, the largest monthly jump in a year, while fresh tomato prices remained high following a new 17% tariff on imports from Mexico.
Full employment is the second part of the Fed’s dual mandate. When considering the October cut, the state-level weekly jobless claims figures, which continued to be released by their respective labor agencies, supported the notion that the labor market remained stable but soft, a view relayed by Chairman Powell. Private data, while mixed, provided additional clues about the labor market. For instance, payroll data from Revelio, which is closely correlated with Bureau of Labor Statistics measures, revealed September payroll gains revised downward, with October showing the second decline in the past six months. ADP payroll data indicated that private payrolls were up after a 4-month soft patch. Outplacement firm Challenger, Gray & Christmas showed layoffs spiking in October, the highest monthly amount in 2025. The mixed data from the various sources supported the view of a soft labor market.
Consumer sentiment continued its four-month long slide, slipping to 50.3, which was barely above the cycle low of 50.0 in June 2022 and was the lowest level since May. Inflation worries persist, although one-year expectations dropped slightly to 4.6%. Job losses, higher prices, personal finances, and the government shutdown were cited by respondents. One-year inflation expectations rose 0.1% to 4.7% while lower term inflation expectations fell slightly to 3.6%, the first decrease in four months. Affordability may be at the root of customer sentiment. Auto affordability dropped as the number of weeks of wages needed to purchase a new vehicle rose to 37.4. Limited supply has hurt housing affordability, pushing prices up in many markets and limiting the impact that near-term Fed rate cuts can have on mortgage rates to provide meaningful relief for borrowers.
Bottom line:
The U.S. economy continues to muddle along. Expect that government economic data production coming online will add more clarity on where the economy stands and what we can expect. Fed Chair Jerome Powell was clear in stating that a December rate cut was “far from” a foregone conclusion—expect the Fed to continue to move cautiously.
