Moody's Mark Zandi Says Fed Should Pause Rate Hikes: 'If I Were King…'

Moody’s Analytics Chief Economist Mark Zandi opines the Federal Reserve should pause the rate hike cycle, given the moderating inflation and easing labor market conditions, but said a rate cut is out of question unless the economy goes into a recession.

What Happened: "If I were king, I would pause the rate hikes. I do think job growth is slowing," Zandi told CNBC.

He pointed out that in March, labor supply grew more quickly than labor demand — something that happened for the first time since the peak of the pandemic shutdown — indicating that unemployment rate was going to head north.

"Then you throw in the moderating inflation and the banking situation, that’s the recipe for a pause in interest rates," Zandi added.

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The economist also believes risks are increasingly on the side of overtightening. "The mis-step here is not the Fed not raising rates enough to quell wage and price pressures, but overtightening and raising rates too much and undermining economic growth," he said.

Zandi holds the view that given the balance of risks and where all the trend lines appear to be pointing with regard to jobs, inflation, considerable amount of uncertainty in the banking system, this is the right time for the Fed to take a pause.

"And if I am wrong and the economy remains stronger, inflation more persistent, they can start raising rates again later in the year," he said.

U.S. markets closed mixed on Monday as investors and traders commenced the week on a cautious note ahead of the release of the consumer price inflation data on Wednesday that will decide the course of the Federal Reserve's next policy decision.

The SPDR S&P 500 ETF Trust SPY closed 0.1% higher while the Invesco QQQ Trust Series 1 QQQ lost 0.05%.

On Inflation: Zandi believes top line inflation could go from 6% in February to something closer to 5% and said core inflation will moderate in the coming times.

"I think what we can state with reasonably high level of confidence is that it is going to moderate in the next 6 to 9 months as the cost of housing services slows. Housing services is the biggest component of the CPI, over a third of the index and that’s tied directly to rents. Rents have gone flat to down here over the past 3, 6, 9 months. That will translate through to lower costs of housing services here through the end of the year," he said.

Zandi believes even if the CPI figure doesn’t show any significant improvement in core inflation, it is "dead ahead."

Rate Cut Possibility: The economist said he doesn't believe the Fed will cut rates unless the economy goes into a recession. "I think the bar is really very high for them to actually cut rates," Zandi said.

He argued that it will be a while for inflation to get back to a level that the central bank is comfortable with. "That’s not going to happen before the end of the year. That’s something that won’t happen until this time next year. I would be very surprised if they start cutting interest rates, barring a recession," Zandi said.

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