Moody was born in New York City and grew up in several of the Connecticut suburbs, including Darien and New Canaan, where he later set stories and novels. He graduated from St. Paul's School in New Hampshire and Brown University.

He received a Master of Fine Arts degree from Columbia University in 1986; nearly two decades later he would criticize the program in an essay in The Atlantic Monthly. Soon after finishing his thesis, he checked himself into a mental hospital for alcoholism. Once sober and while working for Farrar, Straus and Giroux, he wrote his first novel, Garden State, about young people growing up in the industrial wasteland of northern New Jersey, where he was living at the time. In his introduction to a reprint of the novel, he called it the most "naked" thing he has written. Garden State won the Pushcart Editor's Choice Award.

In 2006, Arizona State Senator Thayer Verschoor cited complaints he had received about The Ice Storm as part of the reason he supported a measure allowing students to refuse assignments they find "personally offensive." Verschoor said that "There’s no defense of this book. I can’t believe that anyone would come up here and try to defend that kind of material," although eventually numerous professors did just that.

His memoir The Black Veil (2002) won the PEN/Martha Albrand Award for the Art of the Memoir. He has also received the Addison Metcalf Award, the Paris Review Aga Khan Prize, and a Guggenheim Fellowship. His work has appeared in The New Yorker, Esquire, Conjunctions, Harper's, Details, The New York Times, and Grand Street.

The Diviners was released in 2005. Little, Brown and Company, the publisher of The Diviners, changed the cover after the galleys came out because women reacted negatively to it. The original cover showed a Conan the Barbarian-type image in technicolor orange; the new cover uses that same image, but frames it as a scene on a movie screen.

The Diviners was followed in 2007 by Right Livelihoods, a collection of three novellas published in Britain and Ireland as The Omega Force.

The Four Fingers of Death was released July 28, 2010 by Little, Brown and Company.

In addition to his fiction, Moody is a musician and composer. He belongs to a group called the Wingdale Community Singers, which he describes as performing "woebegone and slightly modernist folk music, of the very antique variety." Moody composed the song "Free What's-his-name", performed by Fly Ashtray on their 1997 EP Flummoxed,