Moody's Chief Economist Zandi: Rate Hikes May Lead to Policy Errors
Moody's Analytics Chief Economist Mark Zandi stated that the risk of the Federal Reserve making serious policy errors is at an "uncomfortably high level and continues to rise." Zandi's comments come as the market is almost certain that the Fed will raise rates by 25 basis points this week; he pointed out that the current growth rate of the U.S. economy is close to the potential growth level of about 2%, with the unemployment rate slightly above 4%, and inflation exceeding 3%. However, this inflation level is largely driven by rising energy prices and supply shocks such as tariffs, rather than overheating demand. Zandi believes that the rate hike as a policy tool cannot directly address inflation caused by supply shocks; if the Fed attempts to lower inflation more quickly by tightening monetary policy further, it must reduce economic growth below potential levels, which is likely to be accompanied by corporate layoffs and rising unemployment. Based on this judgment, Zandi believes a more reasonable policy choice is to wait and observe rather than raise rates at this time. This statement contrasts with previous market reports—according to earlier reports, Fed Chairman Kevin Warsh expressed concerns about inflation during his August speech at Jackson Hole, stating that there is "still work to be done" to combat inflation, leading the market to shift its pricing for the September meeting towards a rate hike expectation; Zandi's statement represents a voice of caution among Wall Street economists regarding this policy path. From a market mechanism perspective, Zandi's core concern lies in the mismatch between monetary policy tools and the current causes of inflation—rate hikes primarily suppress inflation by curbing aggregate demand, but if inflation is mainly driven by supply-side factors such as energy prices and tariffs, rate hikes may directly lead to a decline in corporate investment and hiring willingness, thereby increasing unemployment, which is the so-called "policy error" risk: using demand-side tools to address supply-side issues, at the cost of growth and employment for an improvement in inflation data, and it may not achieve the expected results. If the market believes that the Fed may excessively tighten due to a misjudgment of inflation causes, it typically reflects a repricing of recession expectations—yield curves may further flatten or even invert, cyclical sectors and credit-sensitive assets may come under pressure, while defensive assets may benefit. Who benefits: If the Fed ultimately adopts a "wait and see" approach rather than raising rates, the previously priced-in rate hike expectations will be revised, benefiting interest rate-sensitive growth assets and the credit market; who is under pressure: If the Fed raises rates as the market expects, interest rate-sensitive sectors (real estate, discretionary consumption, highly leveraged companies) and the labor market itself will face more direct cooling pressure.
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Mark Zandi has long served as the Chief Economist at Moody's Analytics and is widely cited as a macroeconomic commentator in Wall Street and Washington policy circles; he has publicly assessed whether monetary policy was "too aggressive" or "too slow" during key turning points in Fed policy, such as the first rate hike in 2015 and the aggressive rate hike cycle from 2022 to 2023, playing a long-term role as a "policy corrector," raising counter-risk warnings when the market forms a consensus expectation. From the resource allocation logic of his argument, Zandi's core concern this time is the potential "resource misallocation" consequences caused by the mismatch of monetary policy tools—if the Fed shifts issues that should be addressed through fiscal, trade, or supply-side policies (such as tariff adjustments or energy supply guarantees) to monetary policy, the end result is a forced contraction of resources on the aggregate demand side (employment, investment) to counter a price issue not caused by overheating demand, which is a typical case of "using the wrong tool to fix the wrong problem" in macro resource allocation. Historical precedents of similar "supply shocks misjudged as overheating demand leading to excessive tightening" include the two oil crises in the 1970s, during which the Fed adopted gradual rate hikes to address inflation driven by supply shocks, but at the cost of stagflation and rising unemployment; while Paul Volcker's choice of a more thorough tightening path after 1979 ultimately suppressed inflation, it also came at the cost of a severe recession. The current stage of the U.S. economy is likened by Zandi to a crossroads in monetary policy path selection—whether to suppress inflation caused by supply-side shocks at the cost of growth and employment is the core trade-off faced by policymakers. This essentially belongs to the policy path divergence under the "regulatory change" background: against the backdrop of a more hawkish stance from the new Fed chairman, the monetary policy framework is shifting from "gradual easing/wait and see" to "prioritizing anti-inflation," while Zandi's statement represents another viewpoint—arguing that policy should more precisely match the actual causes of inflation rather than universally adopting aggregate demand contraction tools. Mechanically, this divergence is important because the transmission path of monetary policy determines who will "pay the price" for inflation control: if rate hikes primarily suppress aggregate demand rather than the supply shock itself, the costs will be borne by the labor market (rising unemployment) and corporate investment (slowing growth), while the supply-side roots of inflation may not be genuinely resolved, which is the structural source of the "policy error" risk that Zandi warns about.