US Economy and Interest Rates
The United States’ Consumer Price Index (CPI) inflation in August, combined with a sharp decline in labor market dynamics, has made a 25 basis point Federal Reserve (Fed) rate cut next week almost certain. This prediction is based on a report from Emkay Global Financial Services, which also expects approximately three cuts in total for 2025.
Inflation Rates and Expectations
The headline CPI rose 0.4 percent month-over-month, exceeding estimates of 0.3 percent, and increased 2.9 percent year-over-year. Core CPI increased by 0.3 percent from July and 3.1 percent year-over-year, aligning with expectations. According to Madhavi Arora, Chief Economist at Emkay Global Financial Services, "August’s CPI data confirms that while inflation may not be getting worse, it is not getting a lot better either."
Impact of Weakening Job Figures
Weakening job figures will likely compel the Fed to focus on the employment side of its dual mandate and restart its easing cycle next week. Core goods inflation rose to 0.3 percent month-over-month, driven by a 1 percent rise in used car prices, as well as higher costs for apparel and recreational items. This suggests a potential tariff pass-through.
Market Reaction
The markets showed positive movement in response to the news, with Treasury yields declining and the dollar decreasing slightly. Overnight, the Dow Jones Industrial Average jumped 1.36 percent, while the Nasdaq advanced by 0.72 percent and the S&P 500 gained 0.85 percent.
Recession Concerns
Mark Zandi, Chief Economist at Moody’s, has expressed concerns that the US is on the verge of a recession based on state-level data. He believes that the economy is showing signs of a recession, citing data on spending, jobs, and manufacturing. Zandi also warned that US tariffs are harming American companies’ profits and that there are persistent problems in the US housing market.
Conclusion
In conclusion, the US economy is facing a complex situation, with inflation rates not improving significantly and labor market dynamics declining. The expected Fed rate cut next week is likely to have a positive impact on the markets, but concerns about a potential recession remain. As the economy continues to evolve, it is essential to monitor key indicators, such as inflation rates, job figures, and market trends, to understand the overall direction of the US economy.
