Moody’s Makes Statement on Likelihood of a FED Rate Cut

Moody’s Analytics Chief Economist Mark Zandi said in a recent interview that he believes the Fed should consider lowering interest rates, arguing that the central bank has achieved its economic goals.

Zandi’s comments came amid ongoing debate about the FED’s current policy stance. “I think they achieved their goal,” Zandi said, adding: “We are at full employment. The unemployment rate increased slightly last year to 4%, which is consistent with a full employment economy.”

According to Zandi, inflation has been running at the Fed’s target of 2% for the past six to twelve months, excluding landlords’ imputed rents. Zandi questioned the need to maintain the current high rate of 5.5%, arguing that the economy may not need such a restrictive monetary policy.

“The equilibrium rate, which is the rate that neither promotes nor constrains growth, is higher than it has been historically for a variety of reasons, but it is not 5.5%,” Zandi said. Warning that maintaining high interest rates could risk economic stability, Zandi said, “As long as the FED keeps its hand on the neck of the economy, it risks breaking something.”

During the discussion, CNBC’s Sarah Eisen noted that the Fed’s target is relying on the Personal Consumption Expenditures (PCE) index, which has not yet reached the desired 2% level. Zandi acknowledged this, but said the trend was moving in the right direction, pointing out that the difference was largely due to the way the implicit cost of home ownership was measured.

Eisen expressed concern about the potential for inflation to reignite, especially given the strong employment and wage growth figures recently announced. Zandi countered by attributing the strong employment numbers to higher immigration and noting signs of a softening labor market, including higher unemployment and hiring rates compared to the previous year, layoffs, unfilled positions, temporary jobs and declines in hours worked.

Despite the strong job market, Zandi believes fundamental data does not point to an impending economic momentum. “Year-on-year inflation in CPI is 3%, meaning real growth is zero last year,” he said and added: “This does not show that things are accelerating.”

Asked whether the Fed’s current policy is misguided, Zandi expressed concern that delaying rate cuts until September could have more significant economic repercussions. While he acknowledged that the economy was resilient and could avoid a hard landing, he argued that the risks of policy failure were increasing.

“The most likely scenario is that they pull it off and the economy has a soft landing,” Zandi said. “But the risk of making a mistake here also increases. The question is: Why would they take that risk?”

*This is not investment advice.

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