The 10-year Treasury yield was below 4% on the day before the United States started bombing Iran. It went through 5% on Tuesday, the highest reading since 2007.
The market has taken that as the case for raising interest rates. Mark Zandi reads the same number as the case against.
"I actually think the economy is on the soft side here, non AI-related."
He has run the economics team at Moody's Analytics for years and had already written, over the weekend, that the odds of a serious Fed policy mistake were uncomfortably high and rising.
The full segment is covered here so you can skip it.
Here are the 8 calls that matter.
👤 Guest: Mark Zandi, Chief Economist at Moody's Analytics, who publishes on the Fed and had called the odds of a policy mistake uncomfortably high days before this meeting
🎙️ Host: Ed Elson, who presents Prof G Markets for Prof G Media
🧩 Other segments: Ed Zitron, host of Better Offline, on the AI safety resignations and what Anthropic's reported 80% gross margin leaves out
📰 Published: 16 September 2026 on YouTube (Prof G Markets)
🔴 YouTube | 🟣 Apple Podcasts | ⏱️ length not available
Key Takeaways
The whole move in the 10-year Treasury yield dates from the start of the Iran war
Below 4% the day before the bombing began, above 5% on the day of the Fed meeting
He would vote to hold, and expects the committee to raise anyway
Fed funds futures put the hike at a 95% probability, against the 88% the host cited
His case is that the inflation is a supply shock and higher rates do not reach it
Tariffs, immigration policy and a war in the Middle East are not interest-rate problems
Inflation expectations, measured by inflation-protected Treasury break-evens, have not moved
That is the number he says would change his mind, and it has not
Getting inflation down through rates means growing below a 2% potential, which means layoffs
The risk he flags is not the hike but the communication around it
Kevin Warsh has said the Fed should not provide much transparency, which Zandi calls untenable
The average American home now costs more than seven times the average household's annual income
The 30-year mortgage rate went above 7% last week for the first time in 15 months
1. 5% and a $109 Barrel
Elson set the segment up with the numbers rather than a question, and the chain he drew runs from the Middle East to the mortgage market.
The 10-year US Treasury yield rose above 5% on Tuesday, its highest level since 2007. He explained for the audience that the 10-year sets borrowing costs across the economy, from mortgages to corporate debt, and that 5% is treated as a threshold that worries markets.
The move was driven in part by oil. Brent crude spiked to $109 a barrel after drone attacks disrupted a pipeline in Saudi Arabia.
On top of that, the August consumer price index held at 3.4% year over year for a second month running.
The pricing going into the decision had moved sharply. Traders were putting an 88% chance on a rate hike, up from 60% before the August inflation report.
2. The Fed Is Locked In
Zandi's first answer was that the decision was effectively already made, and that he did not like it.
He put the probability higher than the host did, from a different market. Fed funds futures on the CME, which is where he said people put money on the line, were at a 95% probability.
"It looks like the Fed's locked in here. They're going to have to raise interest rates."
His causal account starts on a date. "I mean, in fact, if you go back to February 27th, the day before the US started bombing Iran, the 10-year yield was sitting below 4%. And here we are at five, and it's been straight up since."
Before the war, he said, the market was pricing cuts rather than hikes. "Of course, the war has come along, the inflation has kicked in, and now we're talking about, for sure one rate hike." Looking further out: "But if you look at futures they're talking about two three rate hikes quarter point each into next year."
His second driver is the federal deficit, which he said is large even before interest costs: "I mean, we've got a massive deficit. Even excluding interest payments, it's massive." The Treasury is borrowing heavily, demand for money is up, and the price of money is the interest rate.
3. Hot, Not Entrenched
Elson asked whether the 3.4% print had surprised him, and where inflation goes from here.
"Yeah, it surprised me to the upside. It was a little on the hot side. Not a lot." He added that there is a lot of noise in the data and a lot of moving parts, so being surprised is not itself surprising.
He agrees the pass-through is coming. Gas, groceries and air fares all rise with diesel and jet fuel, and he used the price of a ticket to London as his own example.
The question he says actually matters is whether it reaches inflation expectations, because that is what makes inflation persistent. His preferred measure is break-evens — the gap between ordinary Treasuries and Treasury inflation-protected securities, which backs out what investors expect future inflation to be.
On that measure, nothing has happened: "They're right where you would want them to be."
"So, my sense is inflation, it's definitely a problem, and it's going to be a problem in the near term given what's going on in the Middle East and the higher energy prices, but I don't think it's becoming entrenched."
4. He Would Vote to Hold
The section where Zandi put his own vote on the table is also where he described an economy he says is weaker than the headline suggests.
"And so if I were sitting at the Fed, I'd be arguing for a hold in part because of that logic, but also, I actually think the economy is on the soft side here, non AI-related."
His evidence is the labor market and real wages: "The economy is struggling a bit. We're not creating a whole lot of jobs. Wage growth is decelerating. Inflation is now above the rate of wage growth and so real purchasing power is declining."
He expects the committee to go the other way regardless: "I think policy makers really need to be focused on that part of their mandate, but that's not what's going to happen here. They're going to raise rates."
Elson read his own post back to him — that "the odds of a serious Fed policy mistake are uncomfortably high and rising" — and asked whether the mistake he meant was this week's hike.
Zandi's answer separates one hike from a series. One hike is already digested because everyone expects it, and is part of the reason yields are at 5%; the risk is if the meeting signals several more.
5. Rates Can't Fix a War
Elson pushed back on the logic: if real wages are falling because prices are rising, isn't inflation the problem? Zandi agreed it was the problem and denied it was the Fed's problem to solve.
"No, I see it as a huge problem. I just don't think Fed policy higher interest rates are going to solve that problem."
His list of causes are all outside monetary policy. He named the war in Iran, tariffs and immigration policy, and said that on the first of them the interest rate could be raised tenfold without making a difference. "We're paying higher prices because of tariffs and monetary policy isn't going to help you with that."
His growth arithmetic is the core of the objection: "And the other thing is the economy is just growing at its potential 2%. That's real GDP growth. That's what we grew last year. That's what we grew in the first half of this year."
To pull inflation down with rates, he said, you have to grow below that potential, and that has a name. "Well, that means you're going to start losing jobs. Layoffs are going to start kicking in and then you get into this kind of very self-reinforcing negative cycle which ultimately potentially lands in a recession."
He named the condition that would change his answer. If higher energy costs were pushing wage demands, and businesses were granting them because they expected to pass those costs on, he said the Fed would need to break the back of it with higher rates. His closing clause is that "that's not what I'm observing."
6. A Negative Supply Shock
Elson asked whether monetary policy has simply stopped working when an administration uses executive power this heavily. Zandi rejected the framing and replaced it with a narrower one.
"It's not that Fed policy monetary policy has lost its efficacy." On the whole, he said, it is still very effective.
What has changed is what the Fed spends its time on: responding to the consequences of fiscal and economic policy rather than to the business cycle.
He said none of this was a surprise, because the textbook says what tariffs, immigration restrictions and a war do at the same time: "It's a negative supply shock. It means weaker growth and it means higher inflation. It makes life very difficult for the Federal Reserve."
He called it macro 101, and said the two of them had been having versions of this conversation since the tariffs first appeared.
7. Warsh Has to Vote Yes
The closing question was political: Kevin Warsh raising rates means defying both the president and Treasury Secretary Scott Bessent, after Trump spent his predecessor's term demanding cuts.
Zandi's read is that the chair will not dissent, and that the reason is his own standing. He said the chair will have to go along with the rest of the committee because it is all about credibility, and vote for the increase.
"I can't imagine that's going to make anyone happy in the executive branch."
His defense of the outcome is that the job was never a single rate decision: "Kevin Warsh was appointed chairman of the Fed not for a particular rate decision. He was made chair of the Fed because the president trusted his judgment."
The part that worries him is not the vote but the explanation. "Obviously that's changed with the new Fed chair, Kevin Warsh, and he's articulated a view that the Fed should not be providing a lot of transparency here. That feels pretty untenable at this point. You got to explain what's going on and why you're doing what you're doing."
Without that explanation, he said, the odds of a misstep rise — which is what his weekend post was about.
He noted the drama is unusual for being self-inflicted: there is no financial crisis and no pandemic behind this meeting.
8. 7x Income, 7% Mortgages
Elson closed the programme on his own, with a housing explainer that follows the same chain from oil to yields to household budgets.
Home prices in America are more expensive relative to incomes than they have ever been: the average home now costs more than seven times the average household's annual income, higher than at the peak of the housing bubble.
The denominator is the part that has moved most recently. Wage growth has been roughly stagnant while prices rose, and over the past several months average wages have fallen outright — which he attributed to the inflation caused by the war.
"As of last week, the average 30-year mortgage rate rose above 7% for the first time in 15 months."
He walked the audience through the transmission. Oil prices rise, inflation does not slow, bonds sell off globally, long-term Treasury yields rise, and mortgage rates, which are anchored to those yields, follow.
His conclusion is that the two records compound: record prices relative to income plus 7% borrowing costs make this the least affordable housing market the country has had.
He ended on the policy response, playing a clip in which President Trump said he wants to drive housing prices up rather than down, and answering it in one line: he would not count on relief.
Bonus Insights
Zandi's aside on being wrong-footed by the inflation print was a working economist's version of a hedge: with this much noise in the data, "And so it's not surprising that I was surprised."
He pointed out that the one-hike expectation is already embedded in the 5% yield, so the meeting's information content is in the guidance rather than the decision.
On the stock market's weakness going into the meeting, he said it is partly the same expectation being priced.
Zandi's bottom line is that this is a supply-shock inflation the Fed cannot reach with interest rates, that the committee will raise anyway, and that the real risk to markets is a chair who has said he does not intend to explain why.
Products, Companies & Tools Mentioned
CME Group (Its fed funds futures are where Zandi reads a 95% probability of a hike, against the 88% the host cited from elsewhere)
Moody's Analytics (Zandi's firm, and the source of the forecasts he was describing)
Books & Resources Mentioned
Mark Zandi's post on X (The weekend line the host read back to him: the odds of a serious Fed policy mistake are uncomfortably high and rising)
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