Fed’s Rate Cut Deemed ‘More Hawkish Than Anticipated’ Amid Stagflation Fears, Economist Zandi Warns

The Federal Reserve delivered a quarter-point interest rate cut this week, bringing the benchmark federal funds rate to a range of 4% to 4.25%. However, leading economist Mark Zandi of Moody’s Analytics warns that the move carries a “more hawkish” signal than markets had anticipated, suggesting it may not be enough to avert looming economic risks.

Speaking to Fortune, Zandi characterized the Fed’s messaging as a delicate balancing act, aiming to mitigate dangers to job growth without signaling a rapid succession of further cuts. Despite matching expectations for a 25-basis-point reduction, Zandi highlighted Chairman Jerome Powell’s emphasis on managing “downside risks” to the job cycle, rather than initiating an aggressive easing period.

Zandi pointed to unusual political undercurrents, noting the recent appointment of Governor Stephen Miran, who called for a deeper cut and holds a dual role within the White House. This, Zandi suggested, underscores the political pressure on the central bank, with President Biden keen on lower rates. Powell, however, reaffirmed the Fed’s commitment to independence, downplaying the influence of a single dissenting governor.

The economist cautioned that the Fed’s balancing act is increasingly difficult. He observed that job growth has effectively stalled, while tariffs and tighter immigration policies are simultaneously pushing up prices and constraining labor supply. Zandi described this confluence of “upside risks to inflation and downside risks to employment” as a “stagflationary economy,” significantly complicating the Fed’s mandate.

While the Fed frames the cut as “risk management,” Zandi believes policy remains “somewhat restrictive.” He anticipates further cuts in October and December to return rates to neutral by mid-2026. However, he starkly warned that this week’s cut “won’t stave off a jobs recession” by itself, and a failure to deliver subsequent cuts could unravel market optimism and destabilize the economy. The true test of the Fed’s independence, he concluded, will be revealed in the choice of Powell’s successor next year.

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