Bloomberg Opinion Contributor Bill Dudley Talks 'Warsh’s Approach to Fed PolicyIs Deeply Flawed'

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**Jonathan Ferro** (0:07)
The former New York Fed president, Bill Dudley, with a new op-ed titled, Warsh's Approach to Fed Policy Is Deeply Flawed. He writes, outsourcing monetary policy to financial markets is a terrible idea. Warsh missed an opportunity to rebuild the Fed's credibility. Bill join us now for more. Bill, welcome to the program. We were all watching that news conference, and it didn't start terribly. And then progressively, it just got more and more confusing. What was the point in that news conference where you sat up and said, this is weird?

**Bill Dudley** (0:35)
Well, it's weird when you're not explaining why three people are dissenting, yet the committee is deciding on no change in policy. There really was virtually no information about how the Federal Reserve is thinking about monetary policy, how the Federal Reserve is likely to react to incoming information in terms of how they adjust monetary policy.
The silence of Warsh was really quite deafening. And the financial markets basically said thumbs down. I mean, the fact that the 30-year yield went up, the 10-year yield went up, and two-year yields dropped, really was a sign that there was a loss of credibility from that press conference.

**Jonathan Ferro** (1:08)
Bill, I want to highlight a distinction because I think it's important, and it's in the body of your op-ed, and I want to say it for you. You're not against reducing forward guidance. This is important.
I think that the complaints about the people doing the complaining often are around the idea that somehow we still want our hands being cowed, that we want to hold on to the post-GFC communication architecture. Bill, I don't think that's what your criticism is about.

**Bill Dudley** (1:33)
No, I mean, I wrote a group of 30 papers that we published in April, and one of the recommendations was to get rid of forward guidance. The only time you really need forward guidance is when you're at the zero lower bound for interest rates and you're trying to provide additional monetary policy stimulus. But the rest of the time, it really just sort of inhibits the Fed and probably makes the Fed a little bit slower to react to incoming information.
But that doesn't mean you don't want to know what the Fed's monetary policy reaction function is. I think that's the real problem. Warsh and his comments is conflating the two, and they're very, very different. If I don't understand how the Fed Reserve is going to react to incoming information, I can't price financial markets correctly. And it's also creating a lot of uncertainty about what policy is going to be in the future.
The market response on Wednesday was really, Fed credibility has lessened. And I think this is a really own goal on Kevin Warsh's part. I think one of the problems here, I think it's he's over-promised and under-delivered. You know, he's talked about, you know, seat change at the Fed, radical regime change. But then the markets are actually getting very little in terms of guidance on how to think about the new Fed.

**Lisa Abramowicz** (2:38)
Bill, we were discussing about whether maybe some of this was by design. There is going to be more volatility. There has been more volatility both at the front end and the long end in response to every economic data point and comment coming from anyone on the Federal Reserve as a result of an absence of some sort of reaction function articulated by the FOMC chair.
Do you think that this could be by design to help reduce inflation without hiking rates?

**Bill Dudley** (3:01)
I don't think this is a really great strategy for a couple of reasons. Number one, it's a very inefficient way of tightening financial conditions. Basically, you're driving up risk premium in markets. That's a deadweight loss to the economy.
Number two, how well can you actually control the market process to generate the impulse that you want to slow the economy down sufficiently? Lastly, it's a credibility issue. I mean, to the extent that the markets reacted the way they did on Wednesday, that's telling you that people are more worried about the Fed's resolve to do the job. That means inflation expectations are less well anchored than they were prior to the press conference. That in itself makes the Fed's job harder.

**Lisa Abramowicz** (3:37)
Bill, how high is the bar for there to be, I don't want to say mutiny, but the bulk of the FOMC committee voting against the chair, potentially with the governor's joining suit?

**Bill Dudley** (3:48)
I don't think we would get to that. I think at that point, Warsh would throw in the towel and vote with the majority. I can't imagine a situation where the chairman allows himself to be outvoted by the committee, because if you had that result, it basically would be saying that the chairman has lost control of the committee, and that's just not a very good look for any head of any organization.