Moody's Mark Zandi is worried about a 'Fed misstep' if it hikes interest rates when economic risks are piling up

Zandi said he believes a series of threats could pose risks to the U.S. economy over the next 12 to 18 months.

“The Fed is trying to navigate between war-fueled inflation and mounting threats to a fragile economy,” Zandi said. “Raising rates now risks running it aground.”

The economic threats are piling up

Zandi listed a trio of circumstances that could either impede U.S. economic growth or jeopardize it outright.

First is the war in Iran, a conflict that has pushed up gas prices and set off inflation with little end in sight. Negotiations between Iranian and American officials toward a ceasefire are stalled, while reports indicate that the U.S. and Israel have developed detailed plans for another round of military strikes after the November midterms.

Zandi noted that oil prices have climbed close to their wartime peak from six months ago. On October 26, Brent crude was trading at $117 per barrel, just below its April 29 high of $118.

“This will lift inflation, and the Fed can’t ignore that, but rate hikes won’t bring oil prices down,” Zandi said. “Higher oil prices will further undermine real wages and, ultimately, consumer spending, something the Fed shouldn’t dismiss.”

Oil prices are likely to remain elevated going into 2027. The Energy Information Administration, the federal government’s primary source of energy statistics, forecast earlier this month that Brent crude prices would average $105 per barrel in the fourth quarter of 2026.

Prices are projected to slide further to $87 per barrel by April 2027 as oil shipments begin returning to prewar levels, the EIA said.

Zandi also said ongoing turmoil in the Treasury bond market has contributed to higher borrowing costs, particularly in the housing market. He observed that 10-year Treasury yields are “swinging wildly” around 5% while fixed mortgage rates remain above an unaffordable 7%.

“Unless rates recede soon, this will do real damage,” Zandi said. “Bond investors are already doing the Fed’s work for it.”

Last month, the Fed raised borrowing costs for the first time in three years. The vast majority of investors and monetary policy analysts believe the Fed will hold steady this month, according to the CME FedWatch tool.

The Fed rarely raises interest rates ahead of an election. However, multiple Fed officials believe the case is strong for another rate hike before the end of the year, as inflation remains above the central bank’s 2% target.

An AI sell-off?

Lastly, Zandi said a sell-off in AI-related stocks could also rattle the U.S. economy.