Moody's Chief Economist Warns of 40% Downturn Risk as Fed Signals Rate Hikes

Elevated Recession Risk

Moody's chief economist Mark Zandi says there is a 40% chance of a U.S. economic downturn within the next year, well above the 15% historical average. This stark warning reflects growing concerns about the economy's resilience as multiple headwinds converge.

Fed's Hawkish Pivot

The Fed signaled it may have to raise, not lower, rates if inflation continues. Minutes of the Federal Reserve's meeting on interest rates in late April reflect a central bank that is split on the issue of inflation, but with a majority saying a rate hike could be necessary should the conflict in the Middle East continue to drive prices higher. "The 8-4 April 29 hold was the most dissents since 1992," according to economic analysts.

Inflation Shock Broadens

The Consumer Price Index rose 3.8% in April, compared with expectations for a rise of 3.7%, and up from 3.3% in March. Energy prices accounted for 40% of the increase, while shelter and food also surged. "The fact that higher input costs from oil are being readily passed through to consumers, as well as other signs of broadening inflation impact, should both add to the Fed's worries about inflation," said Preston Caldwell, chief US economist at Morningstar.

Policy Outlook Shifts

Bank of America predicts the Federal Reserve will delay lowering interest rates until the second half of 2027, mainly due to strong inflation and resilient job growth. "We no longer expect the Fed to cut rates this year," economists with the financial firm said Friday in a note to clients, while noting that the multiple shocks affecting the economy, including the Iran war, tariffs and emergence of AI, are making it harder to forecast interest rate moves.