Moody's economist Mark Zandi is worried. Not in a vague, hand-wavy way, but in a specific, numbers-on-the-table way. On Monday, he took to X to flag what he sees as a growing risk: the Federal Reserve might be about to make a serious mistake.
"The odds of a serious Fed policy mistake are uncomfortably high and rising," Zandi wrote. Markets, he noted, are all but certain the Fed will raise rates a quarter point at this week's meeting, and they're pricing in more to come.
Here's the thing, though. Zandi points out that the economy is already growing near potential, with real GDP growth around 2%, and operating at full employment, with unemployment a bit above 4%. In other words, this isn't an economy that needs to be slammed on the brakes.
The Kevin Warsh-led Federal Open Market Committee kicks off its two-day meeting today, so the timing of Zandi's warning is not accidental.
Zandi also acknowledged that inflation is too high, running above 3%. But he attributed much of that to higher energy prices and tariffs, supply shocks that interest-rate hikes simply cannot address. Hiking rates to fight a supply-driven inflation spike is a bit like trying to fix a flat tire by changing the oil. It might feel productive, but it doesn't solve the problem.
Worse, Zandi warned that aggressive Fed tightening could trigger layoffs and rising unemployment, creating a self-reinforcing economic downturn. That's the kind of feedback loop nobody wants to test.
He laid out the Fed's dilemma plainly: 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 are undesirable options.
"Neither is a good outcome. Of course, it doesn't have to choose either. It can wait," he wrote.
