Mark Zandi, chief economist at Moody’s Analytics, said the Federal Reserve is unlikely to raise interest rates at its March meeting because there is “a boatload of uncertainty” surrounding 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’ve focused on the banking failures that have rocked the banking system and the markets in the last couple of days,” Zandi told CNBC’s “Street Signs Asia” on Wednesday.
“There’s a lot of uncertainty here,” as a result, the Fed wants to be cautious, he added. “I think they’re going to… [to] decide not to raise interest rates at next week’s meeting.”
His comments came after U.S. regulators closed the Silicon Valley bank on Friday and seized its deposits in the biggest U.S. bank failure since the 2008 financial crisis and the second largest.
On Sunday, politicians tried to freeze depositors at both SVB and Signature Bank to avoid panic over contagion risks.
“Moderation” of inflation
The Fed’s rate hikes may become more difficult as the U.S. economy continues to struggle with high inflation. The latest consumer price index data on Tuesday showed that inflation rose in February, but was in line with expectations.
While inflation remains a problem for the U.S. economy, “it’s moderating” and moving in the right direction, Zandi said.
“But it’s too high. I think … we should probably raise rates again. But at this point it’s more important to focus on what’s in front of you — the potential for bigger problems in the banking system,” he explained.
Zandi is not alone in calling for an end to rate hikes. Goldman Sachs said on Monday it does not expect the Fed to raise rates this month. But the market is still pricing in a 25 basis point hike next week, according to CME Group estimates.
Lowering the bank rating
On Tuesday, Moody’s Investors Service cut its outlook for the entire US banking system from stable to negative.
The rating agency noted the emergency measures taken to support the affected banks. But other institutions with unrealized losses or uninsured depositors could still be at risk, he said.
“I’m not with the rating agency and I don’t comment on the rating action, it’s independent,” Zandi said. But he noted that the move makes sense amid high interest rates, which could put pressure on the banking system.
However, at a fundamental level, the economist believes that the US banking system is “in a very good place.”
The failed institutions were unusual because they served the technology sector in SVB’s case and the cryptocurrency markets in Signature’s case, Zandi said.
“There are troubled banks, but they are exceptional,” he said. They dealt with issues in the technology sector and the crypto market. In addition, the system is well capitalized, highly liquid, and manages risks well. ”
Regional bank shares and many household names took a hit earlier in the week as jittery investors feared the government’s crackdown and takeover of both banks would spill over into the wider sector. But bank stocks rose sharply on Tuesday as regional banks tried to break out of a deep selloff.
Aggressive action
“Very aggressive intervention in the market” by policymakers has helped a lot, Zandi said, but also means the government is “doing everything it can to support the banking system.”
Despite the credible steps, the economist said the Fed should hold off on rate hikes to gauge how tight the situation is and what the impact is on the broader economy and ultimately inflation.
He expects the Fed to raise interest rates two more quarters – by 25 basis points – at the FOMC meetings in May and June.
For now, Zandi reiterated that the Fed is better off “taking a breather here, taking a break and seeing how the banking system responds to all of this and how disruptive it is to the broader economy” and can continue to raise. If inflation remains a problem, rates will rise again at the end of May.
— CNBC’s Jeff Cox contributed to this report