The Fed Could Turn a Mild Downturn Into an Ugly Recession: Ed Yardeni

• The Fed needs to pause rate hike soon to avoid turning making a mild recession worse, Ed Yardeni said. 
• Central bankers have raised rates over 1,700% in the past year, which tip the US into a recession, experts warn. 
• The upper-end of the current interest rate range is “restrictive enough,” Yardeni said.

The Federal Reserve could turn a mild recession into a bigger one if it doesn’t take its foot off the gas of its monetary tightening campaign, according to market veteran Ed Yardeni.

In an interview with CNBC on Thursday, the Yardeni Research president pointed to the Fed’s forecast that the US was likely to tip into a mild recession this year, thanks to high interest rates and recent banking turmoil. But the outlook for the economy could soon worsen, Yardeni said, especially if the central bank doesn’t pause interest rate hikes soon:

“This banking crisis isn’t over and it could turn into an uglier banking crisis, in which case the mild recession could turn into an ugly recession,” he said, urging central bankers to stop hiking interest rates at their next policy meeting in May. “I think it needs to go sideways for a while before there’s more evidence of how the banking crisis is unfolding.”

Experts have warned of an coming recession for months, as central bankers have raised interest rates over 1,700% in the past year to tame inflation, a level that could easily overtighten the economy into a recession. The Fed funds rate is now targeted between a range of 4.75%-5%. That’s the highest rates have been since 2007, and has set off all sorts of alarm bells for a recession.

The risk for a downturn has been amplified due to tighter credit conditions from the collapse of Silicon Valley Bank in early March. Wharton professor Jeremy Siegel estimated the bank’s failure was equivalent to a 75 basis-point rate hike.

Markets are now pricing in a 66% chance of another 25 basis-point rate hike from the Fed in May. But 5%, which is the upper-range of the benchmark rate, is likely “restrictive enough,” Yardeni said. He suggested the Fed pause rates soon if officials intend on maintaining the credibility of the central bank. 

Other commentators have warned of more downside to stocks and the economy ahead as monetary conditions grow tighter, but Yardeni said he would not become more bearish on stocks if the Fed paused rate hikes at the next policy meeting, which he believes is likely. Previously, he called the start of a new bull market, and predicted the S&P 500 could notch a new all-time high if the economy saw a soft-landing, which is a mild slowdown that avoids a full-blown recession.