NextFin news, WASHINGTON D.C., Saturday — Moody's Analytics Chief Economist Mark Zandi warned on Saturday that the U.S. Federal Reserve faces a high bar to avoid cutting interest rates at its upcoming meeting next week. This warning comes amid weak labor market data and ongoing inflation concerns ahead of the release of the August Consumer Price Index (CPI) report.
Zandi, known for his early prediction of the 2008 financial crisis, highlighted that state-level economic data indicate the U.S. economy is on the verge of a recession. He cited weakening trends in consumer spending, jobs, and manufacturing as key factors contributing to this outlook. Additionally, Zandi expressed concerns about the impact of U.S. tariffs on corporate profits and persistent challenges in the housing market.
On Friday, the U.S. Bureau of Labor Statistics reported that the August CPI inflation rose 0.4 percent month-over-month, exceeding the expected 0.3 percent, and increased 2.9 percent year-over-year. Core CPI, which excludes volatile food and energy prices, rose 0.3 percent from July and 3.1 percent annually, aligning with forecasts.
According to a report from Emkay Global Financial Services, these inflation figures, combined with a sharp downturn in labor market dynamics, have made a 25 basis point rate cut by the Federal Reserve at its next Federal Open Market Committee (FOMC) meeting "certain." Traders are now pricing in approximately three rate cuts throughout 2025.
Madhavi Arora, Chief Economist at Emkay Global Financial Services, said, "August's CPI data confirms that while inflation may not be getting worse, it is not getting a lot better either." She added that weakening job figures will compel the Fed to shift its focus toward the employment side of its dual mandate and begin an easing cycle.
The CPI breakdown showed core goods inflation increased by 0.3 percent, driven by a 1 percent rise in used car prices and higher costs for apparel and recreational items. Services inflation decreased to 0.3 percent for the month, while shelter costs rose by 0.4 percent, lodging increased by 2.3 percent, and airfares surged 6 percent.
Financial markets responded positively to the data and expectations of rate cuts. Treasury yields declined, the U.S. dollar weakened slightly, and major stock indices rallied. The Dow Jones Industrial Average rose 1.36 percent, the Nasdaq gained 0.72 percent, and the S&P 500 advanced 0.85 percent.
The Federal Reserve's decision next week is expected to set the tone for U.S. markets heading into the fourth quarter of 2025, with investors closely watching for signals on the pace and scale of rate cuts throughout the remainder of the year.
Sources: Benzinga, SakshiPost, IndUS Business Journal, IANS
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