Mark Zandi, chief economist at Moody’s Analytics, believes the Federal Reserve is unlikely to hike interest rates at its March meeting as there is a “boatload of uncertainty” surrounding recent bank failures.
The financial turmoil of the past few days will surely influence monetary policy decision-making when the Federal Open Market Committee meets next week, he added.
“I think they’re focusing on the bank failures that have messed up the banking system and markets over the past few days,” Zandi told CNBC’s Street Signs Asia on Wednesday.
“There’s a boatload of uncertainty here,” so the Fed will want to be cautious, he added. “I think they’re going… [to] decide not to hike rates at next week’s meeting.”
His comments follow the US regulator which on Friday shut down Silicon Valley Bank and took control of its deposits in the biggest US banking meltdown since the 2008 financial crisis — and the second-biggest on record.
On Sunday, policymakers scrambled to halt depositors at both SVB and Signature Bank, which was also shut down, in a bid to contain contagion panic.
The Fed’s calculation of interest rates could become complicated as the US economy continues to battle high inflation. The latest CPI data on Tuesday showed inflation rose in February but was in line with expectations.
While inflation remains a problem for the US economy, “it’s slowing down” and moving in the right direction, Zandi said.
“But it’s very high. I think… more rate hikes may be in order. But at this point it’s much more important to focus on what’s facing you – that’s the potential for bigger problems in the banking system,” he explained.
Zandi isn’t the only one calling for a pause in rate hikes. On Monday, Goldman Sachs said it does not expect the Fed to hike rates this month. However, according to an estimate by CME Group, the market still expects a 25 basis point hike next week.
Moody’s Investors Service on Tuesday lowered its assessment of the overall US banking system to negative from stable.
The rating agency took note of the extraordinary measures taken to support affected banks. But other institutions with unrealized losses or uninsured depositors could remain at risk.
“I am not in the rating agency and have no comment on the rating action, this is independent,” Zandi said. However, he noted that the move makes sense in the context of higher interest rates, which could put pressure on the banking system.
Still, the economist believes the US banking system is in a “pretty good position” at a fundamental level.
The failed institutions are unusual in that they served 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 headstrong,” he said. They have dealt with the problems in the tech sector and the crypto market. Apart from that, the system is well capitalized, very liquid and has good risk management. ”
Regional bank stocks and a number of household names suffered a setback earlier in the week as nervous investors feared government action and the takeover of both banks would spill over into the broader sector. But bank stocks rose sharply on Tuesday as regional banks tried to recover from a deep sell-off.
The “very aggressive intervention in the market by policymakers” has helped a lot, Zandi said, signaling that the government will “do whatever it takes to support the banking system.”
Despite the reassuring moves, the economist said the Fed should still pause its rate hikes to gauge how much tightening conditions have become and what the impact is on the broader economy and ultimately inflation.
He expects the Fed to make two more rate hikes of 25 basis points each at the FOMC meetings in May and June.
For now, Zandi reiterated that it would be better for the Fed to “just take a breath here, pause and see how the banking system reacts to all of this and how much the economy as a whole is being held back,” and could start raising interest rates again later in May again, should inflation remain an issue.
— CNBC’s Jeff Cox contributed to this report
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