Inflation is on its way back to the Federal Reserve’s target, with markets even getting another encouraging revision on Friday. Yet, nearing mission-accomplished on inflation won’t be the reason the central bank cuts rates, according to one top economist.
Instead, Komal Sri-Kumar, president of Sri-Kumar Global Strategies, says that the ongoing commercial real estate crisis will force the Fed to cut rates as early as May.
“I see what I call a CRE tsunami that is coming,” Sri-Kumar said on CNBC’s “Squawk Box” on Friday. “The timing…you may say it’s not two months, it’s four months, but somewhere in the first half of the year. That’s why I picked the May or June meetings for when rates would be cut.”
Lessons from the 2008 crisis show that the Fed should cut sooner rather than later to avoid the worst of the pain, Sri-Kumar said.
“Don’t act like you did in September 2008, allowing Lehman Brothers to go bankrupt. Supposing you had acted in July, August of 2008, and you had taken the essential steps, the drop would not have been as severe as it turned out to be.”
Fears of a crisis among US regional banks were rekindled in the last week as New York Community Bank saw its stock plunge after it reported disappointing earnings and slashed its dividend to shore up capital. The fears stem in part from exposure to commercial real estate.
The sector has been a source of much anxiety in financial markets, as high interest rates and wobbling asset values mean that banks could be saddled with a mountain of soured loans as borrowers struggle to repay or refinance maturing mortgages.
Yet, officials and banking experts, including Treasury Secretary Janet Yellen, have said they believe that the banking turmoil over the last year is “idiosyncratic” and doesn’t pose a risk to the wider financial system.
But Sri-Kumar challenged this view, suggesting instead that it’s actually a bigger risk, and not limited to NYCB.
“I have been saying for the past year that it is systemic, and it has been building up. I think we are reaching a crescendo right now,” he said, citing China’s Evergrande fallout as a cautionary reference for the US.
“We saw what happened in China with Evergrande and the liquidation, the property sector that is in deep dive,” he said. “The commercial real estate problem is also now in Europe. It is in Japan. So that’s why I think it is systemic and I don’t know why the Treasury Secretary can say she doesn’t think it is systemic.”
Rate-cut timelines have been pushed back in recent weeks. Fed Chair Jerome Powell reiterated at the January FOMC meeting, and again during a “60 Minutes” interview days later, that looser monetary policy is not imminent, and the central bank needs more convincing that inflation is under control.
Wall Street bulls like Fundstrat’s Tom Lee still see a March rate cut as a possibility, though others have warned that the strength of the economy means a rate hike isn’t off the table before the Fed decides to cut.