Moody's Zandi Warns Higher Interest Rates Are Already Damaging the Economy

Moody's chief economist Mark Zandi said the economy is going to start to sag as a result of the Fed's rate increases, according to Yahoo Finance. Before September's Fed meeting, he warned that a hike would be a "serious Fed policy mistake."
The Fed raised rates by a quarter point to a range of 3.75% to 4% on Sept. 16, its first hike in more than three years. Markets are pricing in three to four additional hikes over the next year, including one more in 2026. The 10-year Treasury yield climbed back to 5.28% this past week after hitting a 20-year high recently, while 30-year fixed mortgage rates hit 7.6%, the highest since late 2023.
Zandi said the key is how long rates stay high. If higher rates last only a few months, the conflict in Iran ends, oil prices come down, and the anticipated hikes do not materialize, the economy will be hurt but not hobbled. "But if it goes on for much longer than that and into next year, I think the economy will really start to struggle," he said.
Other points from Zandi:
- If market expectations materialize, a wave of corporate bankruptcies could follow, since many heavily indebted companies have survived only because private equity owners extended debt maturities.
- Higher rates for longer will pressure households with credit card debt and home equity lines of credit.
- AI hyperscalers may be the exception, as high margins and elevated profit expectations let them absorb higher borrowing costs.
- Warsh and other Fed officials view rising yields as a sign of robust growth, while Zandi points to geopolitical friction and market uncertainty. He also thinks a couple of basis points of premium are built into long-term yields because the Fed chair no longer offers forward guidance.
- He is increasingly concerned about a debt-limit battle next fall, particularly if the midterms produce divided government.
- Higher rates alone will not cause a sudden stock market collapse: "The run-up in rates is a corrosive on valuations. It's not a cliff event." But if Nvidia falls short of earnings expectations, the market could turn.