Carolyn Kaster/AP
- The Fed should take a break from raising interest rates in May, a top Moody's economist told CNBC.
- Mark Zandi pointed to weaker US job growth, cooling inflation, and banking turmoil as reasons to pause.
- The Fed's efforts risk taking too much heat out of an already slowing economy, he said.
The Federal Reserve should pause its war on inflation next month before its interest-rate hikes start to really drag down the US economy, according to Moody's Analytics' chief economist.
Mark Zandi pointed to a slowdown in the US jobs market, cooling inflation, and lingering worries about turmoil in the regional banking sector. Official figures out Friday showed the US economy added a lower-than-expected 236,000 jobs in March.
"If I were king, I would pause the rate hikes – I do think job growth is slowing," he told CNBC's "Closing Bell: Overtime" on Monday.
"Then you throw in the moderating inflation and you throw in the banking situation, and I think that's the recipe for a pause in interest rates," he added.
The Fed has lifted interest rates from near-zero to around 5% over the past year in a bid to tame rising price pressures. US inflation soared to 40-year highs last summer thanks to lingering Covid-era supply-chain disruption and a squeeze on global commodity prices stemming from Russia's war on Ukraine.
The US central bank is set to release a policy update on May 3 after its meeting. Zandi and others have called for policymakers to hold borrowing costs at their current level to help support the US economy.
But two-thirds of traders expect the central bank to stick to its anti-inflation mission and raise interest rates by another 25 basis points, going by the CME Group's Fedwatch tool.
Zandi warned that if the Fed carried on raising rates it risked "overtightening" — that is, its efforts to bring inflation down to its 2% target level could take too much momentum out of an already slowing economy.
"I think the risks are increasingly on the side of overtightening — that the misstep here isn't the Fed not raising rates enough to quell wage and price pressures, but overtightening and raising rates too much, undermining economic growth," he told CNBC.
"This is the right time to just take a pause, take a look around," Zandi added. "If I'm wrong and the economy remains stronger and inflation more persistent, the bank can start raising rates again later in the year."
A pause in the Fed's tightening campaign would likely be bullish for stocks. That's because listed companies can borrow at a fixed rate when interest rates stop rising, and that can boost the future cashflows that go into their valuations.
BlackRock's Rick Rieder also believes Friday's jobs numbers have set the stage for the Fed to ease up.
"Presumably, this will also see a cessation of Fed policy rate hikes after one more possible hike at the May meeting, although it's also possible the Fed is done already," the CIO for global fixed income told Reuters on Monday.
"Hopefully … markets can look forward to a more relaxed Fed from here."