The US Dollar Index extended its gains during Asian trading hours on Tuesday, October 27, currently trading above the 102 level.
The dollar's recent strength reflects market bets that the Federal Reserve will continue tightening policy.
However, Moody's (MCO) Analytics Chief Economist Mark Zandi argues that a rate hike at this week's Fed meeting would be a mistake.
He points out that the 10-year Treasury yield is approaching 5%, fixed mortgage rates are above 7%, and credit spreads have widened — rising market interest rates are already tightening policy on their own. Meanwhile, a rate hike cannot resolve the oil supply shock driven by Iran-related tensions, and would instead erode real wages and consumption.
This view contrasts with market pricing and serves more as a dovish marker than a market-driving factor, but it highlights the inherent tension surrounding this week's decision.
Core argument: The bond market has already tightened for the Fed, and hiking now would be a policy error
Moody's (MCO) Analytics Chief Economist Mark Zandi warned that raising rates at this week's Fed meeting would be a mistake.
He believes the bond market is already doing the central bank's tightening work, and that a policy misstep at this juncture is becoming one of the growing risks facing the US economy.
In a post on social media on Monday, Zandi noted that borrowing costs have risen sharply since the Fed's September rate hike.
The 10-year US Treasury yield is hovering near 5%, fixed mortgage rates are above 7%, and corporate bond spreads have widened.
In his view, rising market interest rates are already restraining the economy, and the Fed does not need to add further tightening.
The Federal Open Market Committee meets on October 27-28. After a 25 basis point hike in September, the federal funds rate sits in the 3.75% to 4.00% range, and market pricing suggests at least one more hike before year-end.
The oil price debate: Rate hikes cannot cure a supply shock and instead squeeze real incomes
The trajectory of oil prices is the core element of Zandi's argument.
With tensions escalating in the Middle East, particularly involving Iran, international oil prices have rebounded to levels close to wartime peaks.
Zandi acknowledges that higher energy costs will push up headline inflation readings in the near term, but he emphasizes that rate hikes simply cannot resolve the fundamental problem of a supply-side shock.
On the contrary, rising oil prices directly erode workers' real wages and dampen consumer spending capacity.
Against the backdrop of real incomes already squeezed by energy prices, if the central bank chooses to tighten monetary policy further, it would be adding insult to injury and could push an already strained economy into deeper trouble.
He points out that monetary policy has limited effectiveness against supply shocks, and over-reliance on rate hikes will only cause unnecessary damage to the demand side — ultimately likely at the cost of growth and employment, without fundamentally alleviating energy price volatility driven by geopolitics.
Risk matrix: AI stock selloff, Fed misstep, conflict escalation, trade friction, and financial repression
Zandi also specifically mentioned Moody's (MCO) internal risk matrix.
This matrix ranks the major threats facing the US economy over the next 12 to 18 months according to their likelihood of occurrence and potential damage.
He stated bluntly that there is "a lot of red" in the current matrix, with risk signals heating up significantly.
Specific risks include: a potential concentrated selloff in artificial intelligence-related stocks, a Fed policy misstep itself, further escalation of geopolitical conflicts, escalating trade friction, and financial conditions excessively suppressing economic activity.
These risks do not exist in isolation but are interconnected and may resonate with one another.
In particular, the feedback loop between policy missteps and market volatility, once triggered, could rapidly amplify the impact on the real economy.
Through the risk matrix, Zandi reminds both the market and policymakers that the current environment is no longer a single inflation problem but a complex situation of multiple overlapping uncertainties, requiring more prudent policy operations.
Consistent stance: September's hike was already a "serious mistake," and high core inflation still provides the Fed's rationale
Zandi's warning is not a sudden shift but is highly consistent with his previous stance.
He had explicitly described the September rate hike as a "serious mistake" and repeatedly warned in late September that higher rates were already damaging the economy.
At the same time, the Fed's core rationale for sticking with tightening remains anchored in inflation well above its 2% target: the August headline PCE price index was estimated at 3.8%, while core PCE stood at 3.4%.
Additionally, the rebound in oil prices, tariff-related rhetoric, and large-scale investment in artificial intelligence are all contributing varying degrees of additional price pressure.
Zandi acknowledges that these factors do constitute reasons for the central bank to remain focused on inflation, but he insists that the sharp tightening of financial conditions has already completed most of the tightening task in advance. Further rate hikes will only cause the lagged effects of policy to materialize in a concentrated manner in the future, thereby adding unnecessary economic costs.
Market divergence: Goldman Sachs expects a skip this week and a hike in December
Wall Street's expectations for the Fed's action this week are not uniform.
Some institutions have turned cautious. Goldman Sachs expects the Fed to hold steady at the October meeting and defer the next rate hike to December.
This forecast makes Zandi's argument a dual test — both for this week's meeting and for the subsequent December meeting.
If the Fed does skip a hike this week, it would partly validate the judgment that market interest rates are already sufficiently restrictive. If it ultimately chooses to hike anyway, Zandi may view it as a signal that policy is drifting further from economic fundamentals.
The market divergence itself reflects the complexity of current data and expectations: on one hand, core inflation remains elevated; on the other, financial conditions and real incomes are clearly under pressure.
This week's decision therefore concerns not just the rate level but will serve as a key observation window for testing whether the Fed acknowledges the reality that "the bond market has already done the work."
Summary
Moody's (MCO) Analytics Chief Economist Mark Zandi believes that a Fed rate hike this week would be a mistake, citing the 10-year Treasury yield approaching 5%, mortgage rates above 7%, and widening credit spreads — rising market interest rates are already tightening policy on behalf of the Fed. Meanwhile, rate hikes cannot resolve the Iran-driven oil supply shock and would instead push the economy into trouble by eroding real wages and consumption.
He called the September rate hike a "serious mistake" and cited Moody's (MCO) risk matrix to warn of risks including AI stock selloffs, Fed missteps, conflict escalation, trade friction, and financial repression.
This view contrasts with market pricing for at least one more hike this year and serves more as a dovish marker. Goldman Sachs expects a skip this week and a hike in December, meaning Zandi's argument is a test for both this meeting and the December meeting.
As of 10:23 Beijing time, the US Dollar Index stood at 102.03.
Comments