Aggressive rate hikes from the Fed will raise unemployment, says former central banker, though he doesn’t expect recession in the near term
Mr Dudley remains an influential voice on central bank issues, and has criticized the Fed in recent comments for being too slow to respond to inflationary growth forcing central bankers to shift gears sharply on the rate outlook. has gone. This week, in the wake of heated consumer-level inflation data released on Friday, markets have moved on from expectations of a half-percent increase in a sizable move from the Federal Open Market Committee meeting.
“My understanding is that the Fed decided to do 75 basis points instead of 50 basis points because the data we’ve got over the past week or so is showing higher inflation and perhaps some more disturbing news on inflation expectations. Showing up,” said Mr. Dudley.
Asked if a more aggressive increase of 1 percentage point would be a good idea, Mr. Dudley said, “You can certainly argue that because if you decide that getting there is just as important as the speed That’s the level you’re going to go, so why not get there sooner?” The current federal funds target rate range is now set between 0.75% and 1%.
“I think they’re probably splitting the difference” going for an increase of 75 basis points, Mr Dudley said.
The former central banker said what the Fed has ahead of it will be painful for the economy. Too sharp a change in monetary policy is “not fun for the Fed”, adding that “people are going to be out of work” as a result of what the Fed will do.
Mr Dudley was joined at The Wall Street Journal event by Ellen Mead, a former top-level Fed economist and staff member. She agreed with Mr Dudley that there is a potential for an increase of 75 basis points on Wednesday.
She noted that the move, which was not telegraphed by officials in comments ahead of the FOMC meeting, poses new challenges for a central bank that prefers to use guidance to shape market expectations. Officials pointed to the possibility of a half percentage point increase this week and have done so for weeks.
“Communication is a very important tool and you need to be reliable in your communication,” said Ms. Meade. What has happened with the last minute change in rate hike expectations is “an unusual development”.
Mr Dudley said he did not see a slowdown as an immediate result of aggressive rate hikes, but said the crisis was looming.
In the forecast the central bank will issue on Wednesday, “I think the Fed is going to basically underscore the assumption that we’re going to have a soft landing,” Mr Dudley said.
Fed officials have said they believe an otherwise strong economy rate hikes will reduce excessive demand levels and shift price pressures back toward the 2% inflation target. While unemployment may rise, he has pushed back on the idea that his policy would send the economy into contraction.
“I don’t expect a recession in the very near term,” Mr Dudley said. “The economy has a lot of forward momentum, which is why the Federal Reserve needs to tighten monetary policy a little bit to slow the economy, so I think it’s mostly a 2023-2024 story in terms of hard landing.” “
Mr Dudley also weighed in on the Fed’s balance-sheet contraction plans. The central bank began reducing the size of its holdings this month and the fall would result in a loss of about $100 billion per month on what is now a $9 trillion balance sheet.
Mr Dudley said the balance sheet, at such a large scale, is still providing a boost to the economy. Even with some Fed-owned securities allowed to mature and not be replaced, “the balance sheet isn’t going to go into a tight setting. It’s also not going to remain neutral for nearly three years.” “
write to At [email protected] Michael S. derby
Credit: www.wsj.com /