Moody's Mark Zandi warns of a 'serious' mistake if the Fed hikes rates as Wall Street expects a quarter-point increase

Moody's Chief Economist Mark Zandi Says Federal Reserve Should Delay Rate Increase Expected by Markets

Moody's Analytics chief economist Mark Zandi has stated that the Federal Reserve should refrain from raising interest rates at its upcoming policy meeting, even as most market participants anticipate a quarter-point increase. The central bank is scheduled to convene on Tuesday and Wednesday under Chair Kevin Warsh, who has held the position for more than three months.

Warsh has directed efforts to reduce the amount of forward guidance the Fed provides to financial markets, a shift that has generated unease among some investors. He has also initiated changes to the process by which Fed officials determine interest rate policy. Warsh has indicated he would support higher borrowing costs if inflation does not moderate, attributing persistent price pressures in part to the Iran War that began in February.

Market analysts widely expect the Fed to begin raising rates for the first time since 2023. Zandi has countered that the central bank should proceed with caution. In a post on X, he wrote that the odds of a serious Fed policy mistake are uncomfortably high and rising. Markets are pricing in a quarter-point increase at the next meeting along with additional hikes afterward.

Zandi pointed to steady economic growth near 2 percent and relatively low unemployment as conditions that warrant restraint. He acknowledged that inflation remains above 3 percent but attributed much of the increase to higher energy prices and tariffs. These factors represent supply shocks that monetary policy cannot directly address and that are likely to ease if inflation expectations remain stable.

Zandi described the current environment as presenting difficult choices for policymakers. Increased spending on artificial intelligence by major technology companies has supported equity prices and raised demand for memory chips and related components. This demand has contributed to higher prices for certain consumer electronics such as smartphones, laptops, and gaming consoles, alongside the effects of tariffs implemented by President Donald Trump in the prior year.

According to Zandi, achieving the Fed's inflation target under these conditions would require either slowing the AI-related expansion or applying additional restraint to other sectors of the economy. He stated that neither approach is desirable and that the central bank can defer action. The Fed's next decisions will occur against this backdrop of mixed price pressures and ongoing economic expansion.