Zandi’s view runs against market pricing for at least one more hike this year, so it’s more a marker for the doves than a market mover. It does sharpen focus on the tension in this week’s Fed decision. Oil is the pivot: crude climbing back toward wartime peaks on Iran tensions lifts inflation and keeps the Fed on its hiking path, while also squeezing real incomes in a way that strengthens Zandi’s growth warning. With 10-year yields near 5% and credit spreads wider, any hawkish surprise from the Fed risks further pressure on rate-sensitive sectors such as housing and leveraged borrowers. A skip with hawkish guidance, as Goldman Sachs expects, would keep December live.
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Earlier:
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Zandi’s case is simple: the bond market has already tightened for the Fed, and hiking into an oil shock risks doing the economy’s real damage for it.
Summary:
- Moody’s Analytics chief economist Mark Zandi said on X that a Fed rate hike at this week’s meeting would be a mistake
- He argues rising market rates are already tightening policy, with the 10-year yield near 5%, mortgages above 7% and wider credit spreads
- He warns hikes cannot fix oil supply shocks tied to Iran, which will lift inflation but erode real wages and spending
- Moody’s risk matrix flags an AI stock sell-off, a Fed misstep, intensifying wars, trade escalation and financial repression
- The Fed funds rate is 3.75% to 4.00% after September’s hike, with the FOMC meeting October 27-28
- Zandi called the September hike a serious mistake; Goldman Sachs expects a skip this week and a December hike
Moody’s Analytics chief economist Mark Zandi has warned that raising interest rates at this week’s Federal Reserve meeting would be a mistake, arguing that the bond market is already doing the tightening for the central bank and that a policy error now ranks among the growing risks facing the US economy.
Writing on X on Monday, Zandi pointed to the sharp rise in borrowing costs since the Fed’s September hike. The 10-year Treasury yield is hovering around 5%, fixed mortgage rates are above 7% and corporate bond spreads have widened. In his view, that rise in market rates is already restraining the economy, which leaves no need for the Fed to add to it. The FOMC meets on October 27 and 28, with the federal funds rate at 3.75% to 4.00% after September’s quarter-point increase, and markets pricing at least one more hike before year-end.
Oil sits at the centre of his argument. With prices climbing back toward their wartime peaks on tensions with Iran, Zandi said higher energy costs will push up inflation, but warned that rate hikes cannot fix a supply problem. Instead, he argued, higher oil prices will erode real wages and consumer spending, and tightening into that squeeze risks tipping the economy into trouble.
Zandi also pointed to Moody’s risk matrix, which ranks threats to the economy over the next 12 to 18 months by likelihood and potential damage. He said it contains a lot of red, with risks including an AI stock sell-off, a Fed misstep, intensifying wars, trade escalation and financial repression.
The warning is consistent with his earlier stance. Zandi described September’s hike as a serious mistake and warned in late September that higher rates were already damaging the economy. The Fed’s case for tightening rests on inflation that remains well above target, with headline PCE estimated at 3.8% in August and core at 3.4%, alongside price pressure from oil, tariffs and AI investment.
Some on Wall Street expect the Fed to wait this week. Goldman Sachs sees a skip in October followed by a hike in December, which would leave Zandi’s argument as much a test for the December meeting as for this one.
This article was written by Eamonn Sheridan at investinglive.com.