The Fed’s Wednesday interest rate hike is likely to add to headwinds facing the U.S. economy, according to the chief economist of Moody’s Analytics, as a growing number of analysts see a recession as more likely due to the banking crisis.
“The Fed’s decision to raise interest rates again given the fragile stability in the banking system is disappointing,” tweeted Mark Zandi on Wednesday evening.
The Fed’s decision to raise interest rates again given the fragile stability in the banking system is disappointing. The quarter percentage point rate hike won’t be what breaks things, but it shows the Fed’s willingness to take that chance to get inflation down more quickly.
— Mark Zandi (@Markzandi) March 22, 2023
Zandi called the rate hike “unnecessary”, citing slower economic growth and tighter lending. He also pointed to “moderating” inflation, which he forecast would weaken further “given low oil prices, weak rents, and slower wage gains.”
U.S. prices rose 0.4% in February compared to the previous month, corresponding to a 6.0% year-on-year increase. Core inflation, which excludes energy and food prices, rose 0.5% from the previous month.
The Federal Reserve increased interest rates by a quarter percentage point on Wednesday, citing persistent inflation. The U.S. central bank suggested it might raise rates one more time before the end of the year.
Yet turmoil in the banking sector is “likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation,” the Fed said in a statement.
Banks could scale back lending due to worries about contagion from the collapse of Silicon Valley Bank and Signature Bank, the rescue of Credit Suisse, and troubles at First Republic Bank. Credit tightening would slow economic growth, and Wall Street economists—once increasingly bullish on the chance the U.S. might avoid a recession—are now sounding the alarm of a hard landing.
Even Jerome Powell, chair of the Federal Reserve, suggested on Wednesday that the chaos in the banking sector had the same economic effect as a quarter percentage point increase in exchange rates.
On Twitter, Zandi said that Wednesday’s interest rate hike on its own was unlikely to damage the economy, but rather that it revealed the Federal Reserve’s continued drive to get inflation under control even amid broader economic stumbles.
The economist suggested the Federal Reserve was overcorrecting from its earlier dismissal of inflation as transitory. “The Fed got it wrong when they kept rates too low too long coming out of the pandemic,” he said.
“They now risk raising rates too high too fast,” he added. “That will be on them.”
The Fed got it wrong when they kept rates too low too long coming out of the pandemic. It’s unfair to be too critical given the uncertainties created by the pandemic. And then there is the Russian invasion. But they now risk raising rates too high too fast. That will be on them.
— Mark Zandi (@Markzandi) March 22, 2023