The U.S. stock market surged on Friday, hitting a new record high, as the September Consumer Price Index (CPI) came in below expectations, providing a stronger rationale for the Federal Reserve to continue cutting interest rates at its meeting next week and in December.
U.S. stocks surged on Friday and hit record highs as the September Consumer Price Index (CPI) came in below expectations, providing stronger justification for the Federal Reserve to continue cutting interest rates next week and in December. However, some economists warned that inflation could resurge in the coming months, and vigilance should not be relaxed.
According to Zhitong Finance, Steven Blitz, Managing Director and Chief U.S. Economist at GlobalData TS Lombard, pointed out that future inflation might still transmit to the real economy via the banking system, thereby becoming ‘troublesome’ again. He even suggested that this process could push the current U.S. 10-year Treasury yield of about 4% to 6% or higher within the next one to two years.
On Friday, following a lower-than-expected growth rate in the September CPI, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all closed at record highs. The Dow closed above 47,000 points, marking its 13th all-time high this year; the S&P 500 and Nasdaq recorded their 34th and 33rd closing highs of 2025, respectively. Eric Sterner, Chief Investment Officer at Apollon Wealth Management, noted that several components of inflation, including rent, are showing ‘deflationary signs,’ but acknowledged that ‘inflation remains sticky,’ and it will take time to return to the 2% target.
Meanwhile, U.S. Treasury yields showed mixed performance, with the 3-year Treasury yield falling to 3.49%, significantly lower than the effective federal funds rate of approximately 4.11%. Interest rate futures indicate that the market is pricing in a total of four to five 25-basis-point rate cuts from now until mid-2026.
Blitz believes that in the short term, ‘the economy is actually weaker than the market anticipates, and inflation will continue to decline, prompting the Fed to cut rates, but likely not four or five times.’ He emphasized his focus on the inflation trajectory beyond this year. Once the 3-year Treasury yield rises above the short-term policy rate, restoring a positively sloped short-end yield curve, it would trigger banks to expand credit, reigniting loan growth. This scenario may emerge as early as next summer or sooner.
In Blitz’s analysis, the transition of the short-end curve from negative to positive would strengthen banks’ willingness to expand lending, driving increased leverage spending by businesses and households and supporting sectors like housing. He also added that persistent fiscal deficits, expanded government spending, and limited import-related price benefits due to global trade dynamics could collectively contribute to upward pressure on long-term rates and a resurgence of medium- to long-term inflation.
In a report released on Friday, Blitz highlighted that if the short-end curve turns positive alongside fiscal stimulus and tax incentives working in tandem, credit expansion could have an inflationary impact. Therefore, while not achievable within weeks, the ‘long-term trend’ for the 10-year yield is upward, potentially reaching 6% or higher within the next one to two years.
Concerns over a resurgence of medium- to long-term inflationary pressures are not unique to Blitz. John Luke Tyner, Portfolio Manager at Aptus Capital Advisors, also pointed out that the lagged effects of Fed rate cuts and the potential halt of quantitative tightening by late 2025 (equivalent to an additional rate cut) could both pose risks of re-accelerating inflation. He noted that a recovery in bank lending, rising mortgage and refinancing demand, along with fiscal stimulus from Trump’s ‘Big and Beautiful Bill,’ could all reignite the embers of inflation.