Mark Zandi, chief economist at Moody’s Analytics, sees the Fed as unlikely to raise rates at its March meeting because of “substantial uncertainty” surrounding recent bank failures.
He added that the financial turmoil of the past few days will certainly affect monetary policy decisions when the Federal Open Market Committee meets next week.
“I think they’re focusing on the bank failures that have disrupted the banking system and the markets over the last few days,” Zandi said on CNBC’s “Street Signs Asia” on Wednesday.
“There’s a lot of uncertainty here,” so the Fed will want to be cautious, he added. “I think they will… [to] Decided not to raise rates at next week’s meeting. “
His comments follow U.S. regulators Silicon Valley Bank closed on Friday And reined in its deposits in the biggest U.S. bank failure since the 2008 financial crisis — and the second-largest ever.
On Sunday, policymakers scrambled to support savers The SVB and Signature Bank were also closed to stem panic around the risk of contagion.
Inflation ‘moderate’
As the U.S. economy continues to struggle with high inflation, the Fed’s calculations for interest rates could become complicated.The latest CPI data on Tuesday showed that inflation february risesbut as expected.
While inflation remains an issue for the U.S. economy, “it’s moderating” and moving in the right direction, Zandi said.
“But it’s very high. I think … more rate hikes may be needed. But at this point in time, it’s more important to focus on the problems you’re facing – there could be bigger problems in the banking system,” he explained .
Zandi is not alone in calling for a pause in rate hikes.On Monday, Goldman Sachs said don’t count on the fed rate hike this month.but The market is still pricing in A 25 basis point rate hike is said to be next week CME Group estimates.
bank downgrade
On Tuesday, Moody’s Investors Service downgraded its view on the entire U.S. banking system stable to negative.
The rating agency noted extraordinary actions to support affected banks. But said other institutions with unrealized losses or uninsured depositors could still be at risk.
“I don’t work for the rating agencies and I don’t have any comment on the rating action, it’s independent,” Zandi said. But he noted the move made sense against a backdrop of rising interest rates, which could put pressure on the banking system.
On a fundamental level, though, the economist thinks the U.S. banking system is in a “pretty good place.”
Zandi noted that the failed institutions were unusual because they catered to the tech space in SVB’s case and the crypto market in Signature’s case.
“Some banks are in trouble, but they’re weird,” he said. They grapple with problems in the tech industry and the cryptocurrency market. Beyond that, the system is well-capitalized, liquid, and risk-managed. ”
Shares of regional banks and a string of household names took a hit earlier in the week as jittery investors feared the government’s action and takeover of two lenders would spill over to the wider industry. But bank stocks rose sharply on Tuesday as regional banks attempted to bounce back from a deep sell-off.
aggressive action
Zandi said policymakers’ “very aggressive intervention in markets” helped a lot, while also signaling that the government “will do whatever it takes to support the banking system”.
Despite the reassuring move, the economist said the Fed should hold off on raising interest rates to gauge the extent of the tightening of conditions and the impact on the broader economy and ultimately inflation.
He expects the Fed to hike rates by 25 basis points at the May and June FOMC meetings — 25 basis points at a time.
For now, Zandi reiterated that the Fed would be better off “taking a breather here and pausing to see how the banking system handles all of this and how much of a dampener this is to the broader economy” and possibly resuming rate hikes if inflation remains One question is another rate hike later in May.
—CNBC’s Jeff Cox contributed to this report