Moody’s Analytics chief economist Mark Zandi thinks the Federal Reserve is unlikely to raise rates at its March meeting as there is a “boatload of uncertainty” surrounding the recent bank failures.
The financial turmoil of the past few days will certainly affect monetary policy decisions when the Federal Open Market Committee meets next week, he added.
“I think they’re focused on the bank failures that have rocked the banking system and markets in recent days,” Zandi told CNBC’s “Street Signs Asia” on Wednesday.
“There’s a lot of uncertainty here,” which is why the Fed will want to be cautious, he added. “I think they are going… (going to) decide not to raise interest rates at next week’s meeting.”
His comments follow US regulators closing Silicon Valley Bank on Friday and taking control of its deposits in the largest US bank failure since the 2008 financial crisis – and the second largest on record.
On Sunday, policymakers rushed to back depositors at both the SVB and Signature Bank, which was also closed, to stem panic over contagion risks.
‘Moderate’ inflation
The Fed’s calculation of interest rates could become complicated as the US economy continues to battle against high inflation. Tuesday’s latest consumer price index data showed inflation rose in February, but was in line with expectations.
While inflation remains a problem for the U.S. economy, it is “decreasing” and moving in the right direction, Zandi said.
“But it’s very high. I think more rate hikes are in order. But right now it’s much more important to focus on what’s ahead – that’s the potential for bigger problems in the banking system.” he explained out.
Zandi is not alone in calling for a pause on rate hikes. Goldman Sachs said Monday it does not expect the Fed to raise rates this month. But the market is still pricing in a 25 basis point increase next week, according to an estimate by the CME Group.
Bank downgrade
On Tuesday, Moody’s Investors Service lowered its view on the entire US banking system from stable to negative.
“I’m not with the rating agency and have no comment on the rating action, that’s independent,” Zandi said. But he noted that the move makes sense in the context of higher interest rates, which could put pressure on the banking system.
Still, at a fundamental level, the economist believes the US banking system is in a “pretty good position.”
The failed settings were unusual in that they focused on the technology sector in the case of SVB and the crypto markets, in the case of Signature, Zandi noted.
“There are banks that are in trouble, but they are wayward,” he said. They have become entangled in the problems in the tech sector and the crypto market. Other than that, the system is well capitalized, very liquid, with good risk management. ”
Regional bank stocks and a slew of household names took a hit earlier this week as jittery investors feared government action and the takeover of both banks would spread to the wider industry. But bank stocks rose sharply on Tuesday as regional banks attempted to recover from a deep sell-off.
Aggressive action
Despite the reassuring measures, the economist said the Fed still needs to pause its rate hikes to gauge how much conditions have tightened and the impact on the broader economy and ultimately inflation.
He expects the Fed to make two more quarter-point rate hikes — 25 basis points each — at its May and June FOMC meetings.
For now, Zandi reiterated that it is better for the Fed to “take a breath here, pause and see how the banking system reacts to all of this and how much of a drag that will be on the wider economy,” and could continue to raising interest rates. rates again later in May if inflation remains an issue.