Fed Must End Rate Hikes Quickly to Avoid Recession: Moody's Chief Economist

• The Fed must pause its interest-rate increases quickly to avoid a US recession, Moody's chief economist said. 
• Falling inflation, a softer job market, and a weakened banking system all point to a Fed policy pivot, he said. 
• "The risk of inflation remaining too high appears meaningfully lower than the risk of a recession," Zandi said. 

The Federal Reserve must halt its interest-rate increases quickly for the US economy to dodge a recession, according to Moody's Analytics chief economist Mark Zandi. 

With inflation falling, the labor market easing, and the banking system remaining fragile, it's an opportune time for the central bank to step back from its aggressive monetary policy, Zandi said. 

"The Moody's Analytics outlook is not as bleak, but to skirt a recession the Fed must pivot quickly and end its rate hikes," he said in a Moody's Analytics blog.

"While the banking crisis appears over, its economic impact has only begun to play out; chastened banks with constrained liquidity and diminished capital are sure to be much more cautious," he added. 

Experts have warned of a looming recession for months as the Fed jacked up interest rates by 475 basis points over the past 13 months to get a grip on surging price pressures. Investors expect the US monetary authority to raise rates one more time in May, lifting them by another 25 basis points to a target range of 5%-5.25%, according to the CME FedWatch tool.

But with the fallout from Silicon Valley Bank's collapse spreading across the US banking system in the form of tighter lending standards, top market commentators have urged the central bank to halt rate hikes aimed at lowering inflation to its 2% target, given a credit squeeze only amplifies risks of an economic slump. 

Zandi said he expects inflation to fall to just over 3% by year-end and close in on the Fed's target by mid-2024. The annual rate of consumer-price rises saw a steep drop in March, coming in at 5%. 

"It probably will not kill the economy if the Fed increases rates by another 0.25 percentage point. But why take that risk? The risk of inflation remaining too high appears meaningfully lower than the risk of a recession," Zandi said.