Moody's Warns the Fed Is Risking a Serious Policy Mistake
Moody’s chief economist says another rate hike may do little to fix supply-driven inflation while increasing the risk of layoffs, weaker growth, and a broader economic downturn.
By Eli Breece ·
The Federal Reserve enters this week’s policy meeting facing one of the most difficult tradeoffs of the current economic cycle. Inflation remains above target, but the economy may also be more vulnerable to higher interest rates than headline growth figures suggest.
Mark Zandi, chief economist at Moody’s Analytics, believes the balance of risks is becoming increasingly dangerous. In a recent post, Zandi warned that “the odds of a serious Fed policy mistake are uncomfortably high and rising.”
His concern comes as financial markets broadly expect the Federal Reserve to raise its benchmark interest rate by 25 basis points at the conclusion of its September 15–16 meeting.
The meeting will also include an updated Summary of Economic Projections, giving investors a new look at how officials view inflation, unemployment, economic growth, and the future path of interest rates. The policy statement is scheduled for 2 p.m. Eastern on Wednesday, followed by the Fed chair’s press conference at 2:30 p.m.
At its July meeting, the Fed held the federal funds rate in a range of 3.5% to 3.75%, although three voting members preferred an immediate quarter-point increase.
Consumer prices increased 3.4% over the 12 months through August, while the Consumer Price Index rose 0.4% during the month.
Core inflation, which excludes food and energy, was more moderate at 2.4% year over year, but the headline figure remains well above the Fed’s long-run 2% goal.
Zandi states that much of the recent pressure has come from higher energy prices, tariffs, and other supply-related disruptions. Interest-rate increases are designed to reduce demand by making borrowing more expensive. They can slow housing activity, business investment, and consumer spending, but they cannot produce more energy or reverse a tariff.
A rate increase will most likely push short-term Treasury yields higher if markets expect additional tightening. Longer-term yields could be different though. If investors believe the Fed is becoming too restrictive and increasing recession risk, demand for longer-duration Treasuries could rise, pulling long-term yields lower and steepening the inversion between short- and long-term rates.