Only two Fed meetings remain this year, and the market widely expects at least one of them to deliver another rate hike. But Moody's (MCO) Chief Economist Mark Zandi believes doing so would be a mistake.
In a post on social media platform X on Monday local time, Zandi pointed out that the Fed could well afford to hold off on further rate increases; he used the bond market as an example to show that the Fed does not need to rush to tighten financial conditions. "The 10-year Treasury yield is swinging wildly around 5%, while fixed mortgage rates are holding steady above 7% — a level that is simply unaffordable," Zandi said. "Corporate bond spreads have widened as well. If rates don't come down soon, real damage will be done. Bond investors are effectively doing the Fed's job for it."
In Zandi's view, the "role" played by the bond market is to push up borrowing costs — which is exactly what the Fed is trying to achieve in its effort to curb inflation. Before the Fed's September rate hike, Zandi said he considered that decision a "serious mistake" that could impose a heavy cost on the U.S. economy. A month later, the economist remains focused on the threat posed by further rate hikes — especially against a backdrop of persistently high macroeconomic and geopolitical uncertainty. "The Fed is trying to balance 'war-driven inflation' against 'a growing threat to a fragile economy,'" he noted. "Hiking at this point risks tipping the economy into stagnation."
Zandi pointed out that with no sign of easing in tensions with Iran, global oil prices are rebounding sharply and approaching wartime highs. He acknowledged that this will stoke inflation, which will also be a key topic at this week's Fed meeting; but he added that a rate hike cannot solve the problem of oil supply and may ultimately drag down the economy. "Rising oil prices will further erode real wages, which in turn will hit consumer spending — an issue the Fed should not ignore," he added.
Comments