September’s inflation reading came in at 3%. That marks the fifth straight month of higher inflation. It puts the Federal Reserve in a tough spot. The Fed targets 2% inflation, and the latest data is moving in the wrong direction.
I am Taylor Sohns, CEO of LifeGoal Wealth Advisors, a CIMA and CFP. My focus here is clear: explain what this inflation trend means, how the current data gap complicates the Fed’s next steps, and what I will watch as we move into December. The market expects a rate cut next week. The question now is what comes after.
“September inflation just hit and it’s 3%. The market’s fifth straight month of accelerating inflation. This puts the Fed in a pickle.”
What 3% Inflation Means Right Now
At 3%, inflation remains above the Fed’s 2% goal. The direction also matters. A five-month trend suggests price pressure has not abated. That matters for households and markets.
Inflation affects real wages, savings, and borrowing costs. When price increases accelerate, the Fed is less inclined to ease policy. Cutting interest rates can add demand. That risks even higher prices if supply does not catch up.
We have seen prices for essentials stay sticky. Think shelter, insurance, and services. Those areas tend to be slow to reverse. Even if goods prices behave, services can keep overall inflation firm—the structure of inflation matters, not just the headline number.
Monetary policy works with a lag. Rate cuts today may not show up in the economy for months. The Fed must act on imperfect information. That is always true. It is even more true now.
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The Data Puzzle: Inflation vs. Jobs
Another wrinkle is the current disruption in government data. The government shutdown has halted some releases. Jobs numbers, which are central to the Fed’s dual mandate, are not being published. The labor market may be weakening, but that is an assumption, not confirmed data.
At the same time, inflation reports continue. They are needed to calculate Social Security’s cost-of-living adjustments. So the Fed and the market can see the rising inflation trend. But they cannot see the job picture with the same clarity.
“Jobs data isn’t being published, which is supposedly weak justifying the Fed’s rate cuts. But inflation data is being published because it’s needed for Social Security cost of living adjustments.”
This creates an uneven scoreboard. The visible part shows rising prices. The hidden part may show softer hiring and slower wage growth. The risk is that policy leans on assumptions at a time when each move matters.
Why The Fed’s 2% Target Still Rules
The 2% inflation target is not just a line in the sand. It is the anchor for long-term expectations. When people expect stable prices, they plan, invest, and borrow with more confidence. If expectations drift higher, inflation can become harder to control.
That is why the recent run higher matters. If inflation is rising while the Fed cuts rates, the market could question the Fed’s resolve. That doubt can raise longer-term yields. It can lift mortgage rates even as the policy rate comes down. The Fed wants to avoid that kind of split outcome.
So the Fed faces a trade-off. Support growth if the labor market is weakening, or keep pressure on inflation if price stability looks at risk. The answer may not be a neat one-step move. It may be a sequence with careful messaging.
What Could Happen Next Week
The market expects a rate cut next week. The justification is the assumed weakness in jobs and the need to avoid a sharper slowdown. If the Fed cuts, officials will likely signal that they remain focused on inflation. They may frame the cut as part of a risk-management approach, not a shift to easy policy.
Here is how that could sound from the Fed: we are cutting to support growth while inflation trends remain above target, and we will watch incoming data closely. That is a way to keep options open for December. It is also a way to avoid a market surge that could reignite price pressures.
- Inflation has been at 3% for five months and is rising.
- Jobs data is not available due to the shutdown, but some expect weakness.
- The Fed may cut rates next week while maintaining a firm stance on inflation.
- December remains uncertain without clarity on jobs and wages.
How December Comes Into Focus
December will hinge on a few key factors. First, we need the jobs data back. Payroll growth, the unemployment rate, and wage gains will shape the Fed’s confidence. Weak hiring or soft wages would support another cut. A tight labor market would argue for patience.
Second, we need to see if inflation keeps rising. One month does not settle the trend, but five months carries weight. If the next reading backs off, the Fed gains breathing room. If it climbs again, the December meeting gets tricky.
Third, financial conditions matter. If credit spreads widen or mortgage rates stay elevated, the economy may slow on its own. That can do some of the Fed’s work. If markets rally hard and conditions ease, the Fed may be more cautious.
Why Social Security COLA Keeps The Inflation Data Flowing
Social Security uses inflation data to set the annual cost-of-living adjustment, or COLA. That is why these reports continue even during a shutdown. The CPI figures, especially the index used for COLA, influence benefits for tens of millions of retirees.
This link highlights something important. Inflation is not just a policy number. It affects real people. Benefits rise when inflation rises, but those increases often lag household needs. Retirees and fixed-income households feel persistent price pressure. That is part of the Fed’s calculus. It is also a reason to avoid another wave of inflation surprise.
The Market View: Why Stocks Care
Markets price in future policy, not just the present. A rate cut next week can lift risk assets in the short term. But investors also scan the path ahead. If inflation keeps moving up, the market may rethink how many cuts are coming.
Bonds will react to any hint of sticky inflation. Long rates can rise if investors worry that the Fed is easing too fast. That can hit housing and capital spending. It can also hurt parts of the market that rely on cheap financing.
On the other hand, clear signs of a cooling labor market could push yields lower. That would support housing and rate-sensitive sectors. The key is balance: ease enough to support growth without re-stoking inflation.
My Read On The Fed’s Playbook
I expect the Fed to cut next week. I also expect the Fed to keep its inflation message firm. They will likely avoid promising a series of cuts. They will stress data dependence and flexibility.
For December, the path is open. If jobs data shows softening and inflation cools even modestly, another cut is possible. If inflation surprises higher again, the Fed may pause to assess. Credibility on price stability still guides the long game.
The risk to watch is communication. If the Fed sounds too relaxed on inflation, long-term yields could jump. If the Fed sounds too strict while cutting, markets may worry about policy confusion. Expect careful language and a focus on the word “progress.” The Fed wants proof that inflation is moving back to 2% on a sustained basis.
What I’m Watching Into December
Several signals will help shape expectations as we head to the next meeting.
- The next CPI report: headline and, more importantly, services inflation.
- Jobs and wage growth once data releases resume.
- Consumer spending, especially on services and big-ticket items.
- Financial conditions: mortgage rates, credit spreads, and equity volatility.
- Corporate guidance on demand, hiring, and pricing power.
Each of these tells part of the story. Together, they help confirm whether the economy is cooling without breaking. That is the soft-landing path the Fed still hopes for.
Practical Takeaways For Investors
Investors should prepare for a wider range of outcomes. This is a data-light period, choppy with headlines. Positioning should reflect both inflation risk and growth risk.
Shorter-duration bonds can help manage interest rate volatility—quality matters across asset classes. Companies with healthy balance sheets and stable cash flows tend to hold up better when conditions tighten. Rate-sensitive parts of the market can bounce on cuts, but they can also sag if long rates rise.
Diversification is not about chasing every move. It is about avoiding concentration on any single outcome. A balanced approach can help when policy moves and data gaps collide.
A Final Thought
We are in a strange moment. Inflation is visible and climbing again. Jobs data, a core guide for policy, is out of sight. The Fed has to act with one eye covered.
I expect a rate cut next week. December is less clear. The direction of inflation and the return of labor data will drive that call. Price stability still sets the course. The long-term goal is the 2% target and a steady job market. Until we see clear progress, policy will stay cautious.
“The Federal Reserve will cut interest rates this week, but what will it do in December?”
That question defines the next two months. My recommendation is to stay patient, stay diversified, and watch the data as it returns. The path is open, but the destination still depends on the numbers.
