Moody’s Economist Mark Zandi on Monday voiced concern over the rising possibility of a significant Federal Reserve policy error, as markets anticipate a rate hike on Wednesday.
Zandi took to X to express his apprehension about the Federal Reserve’s potential policy misstep. He stated, “The odds of a serious Fed policy mistake are uncomfortably high and rising.”
He further added, “But the economy is already growing near potential (2% real GDP growth) and operating at full employment (unemployment a bit above 4%).”
The Kevin Warsh-led Federal Open Market Committee’s two-day meeting will commence today.
Zandi also pointed out that inflation is currently too high, running above 3%. However, he attributed much of the inflation to higher energy prices and tariffs, supply shocks that interest-rate hikes cannot address.
He warned that aggressive Fed tightening could trigger layoffs and rising unemployment, creating a self-reinforcing economic downturn.
Zandi stated that the Fed faces a difficult choice: AI investment is driving economic growth while the non-AI economy is already weakening. Bringing inflation down could require either slowing the AI boom or putting more pressure on the broader economy—both undesirable options. The Fed could instead wait and see how the economy evolves.
“Neither is a good outcome. Of course, it doesn’t have to choose either. It can wait,” he wrote.
Market Split Over Rate Hike
Zandi’s post comes at a time when markets anticipate that the Fed will increase rates by a quarter point at Wednesday’s meeting, according to Polymarket traders.
Jeremy Siegel, chief economist at WisdomTree, suggested that the market is signaling the necessity for a rate increase. He believes that the new Federal Reserve chair, Kevin Warsh, might be tested by the market and could potentially raise rates, despite the possibility of political backlash. Siegel expects an initial market sell-off after a rate hike but believes stocks could recover if the move boosts confidence in the Fed’s inflation-fighting credibility and supports long-term bonds.
On the other hand, Truflation CEO Stefan Rust told Benzinga that there would be no rate hike at next week’s meeting, stating that Warsh’s hawkishness is a “distraction from his dovishness. Rust said oil prices could be a key trigger for a rate hike, with crude around $97. He warned that if oil rises above $110, an interest-rate increase is “very likely.”
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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