Federal Reserve Likely to Cut Rates Despite High Inflation
The Federal Reserve is more likely to cut rates next week, according to Moody’s Analytics Chief Economist Mark Zandi, despite inflation running above target. Zandi cites a stalled labor market and rising recession risks as the main reasons for this decision.
Current State of Inflation
The consumer price index (CPI) is currently at 2.9%, which is above the Federal Reserve’s target. The Fed typically tracks! the personal consumption expenditures index, which usually runs lower than the CPI. Zandi notes that a CPI of 2.9% is about half a point above what it should be. However, he believes that the weakening jobs data will outweigh concerns about inflation.
Weakening Jobs Data
The job market is currently at a standstill, with job growth being flat at best. Zandi thinks that this will be the deciding factor in the Fed’s decision to cut rates. He explains that the Fed will prioritize the stalled labor market over concerns about inflation, leading to a rate cut.
Potential for a Bigger Rate Cut
If the CPI comes in softer than expected, Zandi suggests that markets may begin pricing in a more aggressive move. This could potentially lead to a 50-basis-point cut by the Fed. Zandi also notes that the Fed closely monitors bond yields, which have declined sharply. The bond market is a signal of how investors are thinking, and Fed officials pay close attention to it.
Rising Recession Risks
Zandi has warned of a jobs recession and rising recession risks. The US labor market has shown sharp signs of weakness, with a shrinking workforce for the first time since 2020. Zandi has described the downturn as a "labor recession" and cautions that upcoming benchmark revisions could show deeper job losses. He notes that job losses are emerging without a surge in layoffs, raising the risk of a broader economic downturn if businesses begin cutting staff.
Regional Stress
Zandi has also highlighted regional stress, with nearly a third of US GDP concentrated in states at high risk of recession. The Washington, D.C. area has been hit hard by federal job cuts. He compares the situation to clinging to the "edge of the cliff," saying that the economy is dangerously close to tipping over.
Conclusion
In conclusion, the Federal Reserve is likely to cut rates next week despite high inflation, due to a stalled labor market and rising recession risks. The current state of inflation, weakening jobs data, and potential for a bigger rate cut all support this decision. With rising recession risks and regional stress, it is crucial for the Fed to take action to prevent a broader economic downturn. As Zandi notes, the economy is dangerously close to tipping over, and a rate cut may be just what is needed to prevent a recession.
