Moody's chief economist Mark Zandi has issued a fresh warning that despite the U.S. GDP growth this year and apparent economic resilience, warning signs are already flashing. He noted that the Federal Reserve, under new Chairman Kevin Warsh, is facing a policy dilemma—with inflation pressures remaining elevated, the Fed is unable to deploy rate cuts or other conventional tools to boost the economy or support employment growth, severely limiting its monetary policy space.
Compounding the challenge, U.S. inflation expectations have surged sharply amid the ongoing Iran war. Zandi stressed that if this trend persists and inflation expectations continue to climb, it could force the Fed to raise interest rates, even at the risk of triggering a full-blown recession. He explained that in such a scenario, controlling inflation would be seen as the overriding priority for policymakers, with economic growth and employment targets taking a backseat to price stability. This assessment underscores the difficult position the Fed finds itself in and serves as a wake-up call for global markets.