Downward angle icon Downward angle icon. Reuters Moody's Mark Zandi said the Fed risks “disturbing” the economy if it delays cutting interest rates. Higher rates increase the chance of recession and bank failures, he warned. “If I were king for a day, I'd really cut rates at this point,” Zandi told Yahoo Finance.
Mark Zandi, chief economist at Moody's Analytics, said the Fed would be better off cutting interest rates as soon as possible because there's a risk that parts of the economy will “collapse” if rates don't fall.
Zandi warned Yahoo Finance on Thursday about the consequences if the Fed doesn't cut interest rates in the coming months. Keeping rates at their current levels could increase the risk of a recession and expose other cracks in the financial system, he said.
“These interest rates eat away at the economy. They drain the economy and at some point something could break. The risk they're taking here is that they weaken the economy and we have a recession,” the top economist said. “If I was king for a day, I would really cut interest rates at this point because I think the economy certainly needs that relief.”
Zandi said the strength of the economy suggests the U.S. is not close to a recession, but rising interest rates have already started to hurt the economy. Higher borrowing costs are slowing loan growth and “deteriorating” credit terms, which could strain bank balance sheets, he said.
Zandi noted that the collapse of Silicon Valley Bank last year triggered a brief banking crisis that led to a wave of regional bank failures, including the collapse of two other banks.
“That's what worries me with interest rates remaining so high,” he said.
Other market commentators have warned of more bank turmoil as borrowing costs remain high. Billionaire investor Barry Sternlicht has predicted a bank failure could occur every week in the United States, due in part to high interest rates on commercial real estate loans.
But the Fed is seeking more evidence that inflation is on track to settle at its 2% target, and the central bank appears poised to keep rates higher for longer. Prices have risen more than expected over the past three months, with inflation hitting 3.5% in March.
Zandi predicted the Fed will likely wait another two to three months before moving to ease monetary policy as the central bank waits for inflation indicators to stabilize.
Markets are focused on April inflation numbers next week, but hopes for aggressive rate cuts this year have been dashed. Investors are now pricing in one or two rate cuts by the end of 2024, down from six expected at the start of the year, according to the CME FedWatch tool.