Fed’s confidence was ‘very brittle’ heading into rate decision amid banking pressures: Economist

Fed shared Jerome Powell noting in today's FOMC press conference at the reserve did consider halting its rate hikes but ultimately decided to continue on its path and hike interest rates by 25 basis points. Joining us now is Mark Zandy, Moody's analytics chief economist. Mark, good to see you sir. What was your reaction to the 25 point hike and to that language that we've continued to focus on which of course is additional policy firming a slight tweak from prior meetings? Well, I was disappointed. You know, I thought that they should pause in their rate hikes. It seems very uncongressive that one week you're establishing a credit facility to provide liquidity to the bank so they can pay off depositors, take pressure off the banking system and then the next week you're raising interest rates which will clearly put pressure on the banking system. So I don't know how to square those two things.

I mean, I think they tried, the Fed tried to thread the needle here, kind of a dovish rate hike, but I don't know, it doesn't look like they succeeded in doing that. So I fear that they are exacerbating the concerns out there and I think it was a mistake not to pause. So exacerbating some of the concerns out there, what does that mean specifically for the banking system? More chaos, more failures? It shouldn't, right? I mean, look, the system broadly is in very good shape, lots of capital, I think liquidity is fine and the government has stepped up and done a lot, ensuring deposits of all depositors have failed institutions. I mentioned the credit facility that Fed established. You know, they're ripping out the weak links in the system by either shutting down weak banks or forcing others to merge with stronger banks or cajoling the big guys to help the small guys. So, you know, they're doing all the right things and they're doing it very quickly, but you know, the confidence is very brittle and it was brittle coming into this and so I think the priority should be, judging by the reaction here, remains to be establishing confidence in the financial system. That's got to be the first priority.

Now, inflation is high, too high, you've got to get that in, but I think the first thing to do is make sure the system's on a solid footing before you can pivot back and start addressing the high inflation again. Of course, Mark, the theory goes that if they did not raise, if they paused, then that would have led to some panic. Oh, maybe things are worse than we otherwise thought and thought. Brian Belsky told us earlier, he thought if they paused, the markets would fall dramatically on that news because the interpretation would be, oh boy, things must be worse than we think. Your thoughts on that? I don't get that at all. I don't understand that at all. I mean, it's obvious the banking system is under a lot of pressure.

It's not, you know, last week we had bank runs, you know, it was very clear to everybody that the system is under a lot of pressure, remains under pressure, and so I don't know that you're fooling anyone by saying, oh, I'm increasing rates because I'm not worried about the system, it doesn't fool anybody. So I don't get that at all. You know, I don't understand that psychology. My, you know, who knows, I don't know what the counterfactual is here, but my sense is if the Fed paused, we'd see green on the screen, not red at this point in time. Mark, the Fed didn't pause and Powell said if more hikes are needed, then they are going to do that. Does that make a recession a sure thing? And I guess how deep of a recession could we see? No, it's not a sure thing. I mean, we do need a little bit of luck.

I mean, we can't, the banking crisis can't continue on here. We can't get hit by something else. And we need some reasonably deft policymaking, good policymaking by the Federal Reserve. And if so, then I think the, you know, the strong fundamentals of the economy will continue to shine through and will avoid an outright economic downturn. So no, I don't think it's inevitable, but I do think it's important that policy makers recognize the risks here and focus on it, make, you know, make the system, the financial system priority number one, we've got to make sure, and it's not just about the reality of whether the system is sound or not. I think it is. It's about making sure that people are confident that they believe that the financial system is sound.

And that's what hasn't been repaired yet. I mean, how could it be? It was just literally not more than 10 days ago that we were struggling with bank failures and bank runs and concerns about the system as a whole. So it's hard to believe 10 days later, you'd feel like everything is fine. It's not. And so I think that they need to establish that confidence. But if we, if they, if they're, if they can focus on that and get that done, I think the economy has a lot of things going for it, and we should be able to navigate through without an economic downturn. It's not going to be easy.

I'm not saying it's not going to be really bumpy and uncomfortable at times like now, it's pretty uncomfortable, but I think we'll be able to navigate through. But I say that with less confidence today than I, you know, I would have said that two weeks ago. Well, that is the dissenting opinion I have longed to hear. Mark Sandy, good to see you, sir. Thank you for that perspective.

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