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All right, let's talk a little bit more about this inflation print for that. We want to bring in Mark Zandi. He's Moody's Analytics chief economist. Mark, it's great to have you here. So let's start with that headline number that we got out this morning. Not really pointing to any sort of that upside pressure that maybe the markets have been a little bit nervous that we were going to see. How does this then set up the Fed, do you think for September?

Well, they should cut rates. Uh you know, I think they should have been cutting rates uh months ago but uh I I think the the there's this is proof positive that they've gotten inflation back to their target. Uh low stable inflation. Of course, we know that the labor market's weakening uh uh and unemployment is uh ticking higher here and then you throw in the volatility that we've seen in global financial markets. I you know, I think it all adds up to a rate cut. I'd be very, very surprised at this point if they don't cut rates in a few weeks.

What what are you saying? They should have cut in July, Mark?

Oh yeah. Uh Brad months ago. I mean, you know, uh they've achieved their objectives. Uh we're at full employment uh uh 4.3% unemployment rate. You could even argue we're now on the soft side of full employment uh and unemployment is moving higher uh and uh inflation's back uh you know, consistent with their target. Um uh and uh that argues for uh and a federal funds rate target that's lower than 5 and a half percent. You know, 5 and a half percent is quite high and putting a lot of pressure on the economy and financial system. So, yeah, I I I think they should have been cutting interest rates months ago, but okay, here we are uh and and I think they're ready to go.

Do you think we get a 50 basis point cut? And and is that 50 basis point cut almost like uh the NBA fans out there would call a a makeup call, if you will?

Uh well, you know, what they should do and what they will do probably two different things. Uh you know, if if I were uh were there I'd be arguing for a 50 basis point cut because again, 5 and a half percent is too high uh and they need to get that down to something that's more consistent with that you know, an economy that's at full employment, inflation back in and target, but I I think much more likely they'll go a quarter point that they'll continue to stick with a a quarter point cut and and try to cut rates a quarter point each quarter going forward. I think that's what their preferred path is going forward here, even though you know, I would argue that they should get rates down much faster than that.

Mark, when you take apart or when you take a look at the labor part of this, the the labor side of the dual mandate there, more of the emphasis should more of the emphasis beyond the jobs picture at this point and when you see the deterioration that we did in last month's print, what does that tell us then about a risk of a recession?

Well, it's I I'd put equal weight on both, uh inflation and and full employment. Uh I think they're equally important here. Uh and uh but you know, no matter how you measure it, I think they're there. Uh they've achieved their targets uh both in terms of unemployment and inflation. Uh you know, it I I would also point out that the the trend lines suggests even higher unemployment and even lower inflation. So, you know, if you kind of look out three, six, nine months from now given the current trend lines that the case for, you know, more rate cuts would be even even stronger, you know, if you look into next year.

Mark, what do you think the probability of a recession is at this point?

Uh I put them at about one and three starting at some point in the next year. That's high. Uh kind of in a typical economy the so-called unconditional probability of recession is about half that, about 15%. You get recessions typically once every six, seven years, so one third probabilities on the high side. And it will continue to rise until the Federal Reserve actually starts to cut interest rates. So, another reason for them to to get moving here.

With all this in mind, Mark, as we're tracking and and all of this data that's come out, where do you think the Fed is going to continue to place even more of their emphasis? Because as we're kind of focused in on the inflation side, it it's still going to come back to how people are looking at the broader employment economy and trying to figure out where there's opportunity for upward mobility, where there's opportunity to get a better wage, and and how that all passes through to the inflation picture.

Well, I think the key statistic now, Brad, is uh is uh layoffs. You know, do businesses, you know, as we as you know, businesses have already uh pulled back on their hiring unless the slowing in job creation. But fortunately, so far they've not increased layoffs to any significant degree. Uh but if that were to happen, then we're in a different ball game. Uh you know, recession risks would rise much higher than I'm currently anticipating. So a good read on that would be the initial claims for unemployment insurance that we get every Thursday morning. We'll get another read on that tomorrow morning, for example. Uh and and that's a good window, timely window on whether businesses are starting to lay off uh to more significant degree. That hasn't happened yet, but that's what I would be watching to gauge, you know, whether the Fed needs to uh and will accelerate its uh rate cutting here.

Mark, as we look ahead to the 2024 election, obviously it's too close to even try to begin to figure out or predict what is going to happen here in November, but I want to bring up some of that recent commentary that we got from former President Donald Trump, and he was talking about the fact that he ultimately wants more control over the Fed. And and my question to you is what risks does this potentially pose to the economy and I guess just your reaction to those comments.

Well, no, it won't be any surprise you. I think uh that's a bad idea. Uh you know, I I think if you look at uh other countries' experiences with uh allowing their executive branch to have input into monetary policy, even our own experience. You know, go back to President Nixon and uh the Fed at that time. Uh that it never ends well. Uh you know, the the executive, the the president in our case has an incentive to keep rates too low for too long. It ultimately fans inflationary pressures and the economy is much diminished by that. A a a a cornerstone of a well-functioning market economy like our economy is an independent central bank, an independent Federal Reserve. So anything that's done to uh impair that independence is a really, really bad idea and will lead to ultimately to higher inflation and a weaker economy.

Mark Zandi, always a pleasure to speak with you. Mark Zandi who's the Moody's Analytics chief economist here. Thanks for kicking off the morning with us, Mark.

Sure thing.