What happens if the Fed holds rates too high for too long?
June's Consumer Price Index brought good news to Wall Street as it signaled inflation cooling more than expected. As all eyes are on the Federal Reserve's first interest rate cut, Moody's Analytics chief economist Mark Zandi joins the Morning Brief to discuss the state of the economy and what may happen if the Fed continues to hold rates at a high level. "The economy is under a lot of strain from the higher rates. It's doing some damage. The labor market is the most obvious place. I mean, hours worked are down, temp. jobs are down, the hiring rates [and] quit rates are down. The job growth is slowing. All the revisions we're getting now are to the downside," Zandi explains. If the Fed keeps holding rates at these high levels, he believes that the economy could take an even bigger hit. Zandi adds that the broader financial system is under pressure: "The yield curve is inverted, short-term interest rates are higher than long-term rates, and that is a very uncomfortable place for folks in the financial system trying to make some money on their net interest margins. And so I worry that we could see some other type of event in the financial system." He says the bond market (^TYX, ^TNX, ^FVX) feels "really choppy," pointing to poor liquidity and quantitative tightening (QT). He explains, "The Fed is pulling out of the bond market through its QT. And that means some other buyer has to step in. And it turns out that that buyer are hedge funds. And hedge funds are obviously very price sensitive... and that creates a lot more volatility, makes the bond market more fragile." For more expert insight and the latest market action, click here to watch this full episode of Morning Brief. This post was written by Melanie Riehl
