Bloomberg
- The Fed's dovish tone has fueled a market rally that complicates its missions, economist Komal Sri-Kumar said.
- He said that prolonged high interest rates could trigger a hard landing.
- The Fed will unveil its latest rate decision at 2 p.m. ET Wednesday.
The Federal Reserve's dovish tone since the end of last year has fueled a market rally and loosened financial conditions, complicating its mission and potentially setting the stage for further tightening, according to economist Komal Sri-Kumar.
The president of Sri-Kumar Global Strategies said on Wednesday that he sees "no reason" for the dovishness that the Fed has been broadcasting to markets, and that he worries about the potential for a policy reversal.
"It'd have been better to be more cautious on the forecast in terms of expectations so that you don't have to reverse, and that is the risk," he said in an interview with CNBC, adding that the Fed supercharged rate cut expectations, but easing financial conditions could more inflationary pressures and cause a pivot back to a more hawkish stance.
"There's a rally, and the rally makes it more difficult to control inflation at a future point in time," he said.
Sri-Kumar previously anticipated a more accommodative monetary policy stance, suggesting that distress in commercial real estate would compel the Fed to cut rates in May.
Sri-Kumar warned that if the central bank keeps rates higher for longer, a "hard landing" scenario could drag down multiple industries, including banking and real estate.
"If you have the Fed not cutting interest rates, not only today, but also May 31 or June 12. Then there is a pressure to push the 10-year yield up," he said, pointing to mid-size and small banks that bought 10-year treasuries at low rates, which would be " more underwater than they are today" if rates stay high.
The Federal Open Market Committee meeting will conclude Wednesday at 2 p.m. ET, and will be followed by a press conference from Fed Chair Jerome Powell. The CME FedWatch Tool shows markets think odds are nearly 100% that officials leave rates unchanged.