In a significant development for global markets, San Francisco Federal Reserve Bank President Mary Daly hinted that two interest rate cuts could be appropriate before the end of 2025, despite cooling labor markets, resilient inflation, and mixed retail data. During a Fox Business interview, Daly emphasized that while economic growth is slowing and the labor market is softening, inflation remains above the Fed’s 2 percent target. As such, she suggested proactive easing rather than waiting for definite proof of inflation decline—warning that delays could jeopardize labor market strength.

U.S. Consumer Sentiment Plummets Amid Renewed Inflation Fears

The University of Michigan’s preliminary August 2025 consumer sentiment index dropped sharply to 58.6, defying expectations of improvement. Rising worries about inflation—prompted by renewed tariff concerns—pushed inflation expectations up to 4.9 percent, from July’s 4.5 percent. Interestingly, despite surging pessimism, "hard" data like July’s retail sales painted a contrasting picture of strong consumer spending—a divergence that may stress economic forecasts going forward.

American Job Market Pessimism Reaches Great Recession Levels

Consumer surveys reveal that confidence in the job market has fallen to its lowest point since the Great Recession. Fueled by Trump's steep tariffs on imports and mounting inflation anxiety, worries about job security are intensifying—even though fundamental data has yet to confirm a recession. Analysts note that, although consumer spending remains relatively stable, many households appear braced for a downturn that isn’t yet evident in official figures.

Why This Matters

  • Monetary Policy Outlook
    Mary Daly’s suggestion of rate cuts signals a shift toward preemptive easing, aiming to support labor markets even if inflation hasn’t fully normalized.

  • Consumer Behavior Disconnect
    The divergence between sentiment and spending complicates forecasting. If consumers doubt their financial security, they may eventually pull back on spending—exposing economic vulnerability.

  • Headline Risk from Fear
    Job market anxiety—even absent a downturn—can dampen consumption and business investment, creating real slowdowns born from perception rather than fundamentals.

Conclusion
As of August 16, 2025, the U.S. economy stands at a tense crossroads. The Federal Reserve appears increasingly inclined to shift toward a softer monetary stance, yet households remain on edge—suspicious, unsure, and emotionally distant from actual resiliency in spending data.

Watch for:

  • Inflation trends in the coming months
  • Marches between sentiment and spending
  • Signals in Fed communications and actual policy moves

This economic tug-of-war—between confidence and data, between caution and action—will define markets and policy agendas through the fall.

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