Reuters/Joshua Roberts
- The Federal Reserve needs to be extra careful not to fuel an economic slump, according to KPMG's chief economist.
- Diane Swonk warned that a looming credit crunch makes a "hard landing" scenario more likely.
- “The real risk now is that we up the ante, that the Fed overshoots,” she told CNBC.
The Federal Reserve needs to be extra careful not to overdo its war on inflation with the US economy at risk of suffering a credit crunch, according to KPMG's chief economist.
"The real risk now is that we up the ante, that the Fed overshoots," Diane Swonk told CNBC's "The Exchange" on Wednesday.
"That sets the stage for this harder landing, I call it cooling and slipping through the ice," she added.
"They don't want to send the economy into a deep freeze, but you're going to get a bit more chill than you'd like and a harder landing with the Fed continuing to fight inflation and the pipeline of tightening that we have in the credit system already."
SVB Financial's failure last month rocked publicly-listed regional banks across the US – and economists have warned the turmoil could lead to lenders tightening their standards in a bid to rein in risk.
That would make it tougher for small, growing businesses to borrow cash, hindering their growth and increasing the likelihood of an economic slowdown, according to Swonk.
Businesses with fewer than 250 employees "are going to slowly feel a crunch in credit, and this is a slow-moving trainwreck, that's how I see it," she said.
That credit crunch would come at a time when the Fed is signaling it still wants to press ahead with interest-rate hikes in order to bring inflation down to its 2% target.
Just under 50% of all traders think the central bank will bring in another 25-basis-point rate hike at its next meeting in May despite concerns about fragility in the financial system, according to CME Group's Fedwatch tool.
But the Fed risks fueling an economic slump if it blindly presses ahead with its tightening campaign when there's such a high risk of financial instability, according to Swonk.
"The Fed has sort of doubled down, even through financial market fragilities and additional tightening in the pipeline, that they're going to continue to fight inflation and divorce the idea of rate hikes from financial stability tools," she told CNBC.
"The two are intertwined, you can't just divorce them, the break-up is not easy."
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