Former New York Fed President Bill Dudley Talks Fed Rate Hike

SPEAKER_1 (0:02)

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SPEAKER_2 (0:07)

The Federal Reserve taking on inflation with the first interest rate hike since 2023 The committee signaling more monetary tightening to come. The former New York Fed president, Bill Dudley, writing a 25 basis point hike is too small to have a meaningful impact on economic activity. Bill joins us now for more. Bill, welcome to the program. Before this decision, you wrote in your column, you said the case for a hike was crystal clear. Is the case for another hike just as clear?

Bill Dudley (0:34)

Right now it is, unless the data changes pretty dramatically. Kevin Warsh basically said that he needs to make financial conditions less accommodative, probably push them into the restrictive side. And he hasn't told us how much you need to do to do that, but judging by the reaction of financial markets, he hasn't really accomplished that yet.

I think that he also signaled that this is probably the first in the series by talking about removing a dose of accommodation. That implies that there's more doses to remove forthcoming. And if you look at what the Federal Funds Futures Market is pricing in, they're pricing in three or four hikes over the next 69 months. So the market certainly expects that the Fed's not done. And that makes sense. If financial conditions are accommodative, that's causing the economy to grow at an unsustainable pace. You need to do more to make financial conditions less accommodative, to restrain economic activity. What's interesting about the Fed's forecast, it's sort of the immaculate disinflation. If you look at the summary of economic projections, growth doesn't slow, unemployment rate doesn't rise, inflation magically sinks back to 2%.

I think it's going to be a little bit harder than that.

SPEAKER_2 (1:41)

Bill, do you think we need the demand destruction? And what kind of level rates do you think is necessary to get that demand destruction, to get inflation back to target?

Bill Dudley (1:51)

Well, it's hard to know because it depends a little bit on how financial markets react.

I agree with Kevin that financial conditions are really the way of judging the stance of monetary policy because that's how monetary policy gets communicated to the economy. So if the stock market ignores the Fed's tightening, if the bond market ignores the Fed's tightening, then there's more for the Fed to do.

SPEAKER_4 (2:11)

Did you think that Kevin Orr did a really good job at this press conference, or do you think that he should have illuminated a little bit more kind of how he was thinking about the path forward?

Bill Dudley (2:21)

I think he did a much better job, but he was still very, very guarded. No follow-up questions. The answers were very short. Didn't really answer the question about where's neutral in terms of a neutral federal funds rate. I think it's an odd concept not to have a view of whether monetary policy today is easy, neutral, or tight.

I think you need to have some framing of where you think the federal funds rate is today in terms of whether it's providing positive impetus or negative impetus to the economy. So certainly much better, but still very, very guarded, very, very constrained.

SPEAKER_4 (2:56)

Do you have a sense that neutral is significantly higher? I mean, that was sort of the implication when he said that they're removing some of the accommodation. Or do you think that that phrase was just a commentary on last year's 75 basis points of rate cuts?

Bill Dudley (3:08)

Yeah, I think neutral is higher. I mean, it's higher because we have this huge AI investment spending boom that's pushing up to neutral rate. That's increasing the demand for capital. Now, if the investment spending boom comes to an end, then the neutral rate will probably drop back down. But for the time being, as we're spending hundreds and hundreds of billions of dollars on these data centers and the chips to fill them, the neutral is going to be higher and the Fed's got to take that on board.

SPEAKER_2 (3:32)

Bill, we often reflect on a conversation that we had together coming out of the pandemic. I believe it was 2021, maybe it was early 22 I remember it was with Mohammed Al-Eran at the time as well. You made the case this Fed might have to go to five, which just sounded crazy at the time because I think we were still close to zero.

They went to five and they had to go further. Bill, it didn't cause the pain that the Fed share at the time was talking about in Jackson Hole a couple of years later once he got there, the pain that was required to get inflation back to target. But what is it about this economy? You alluded to some of it, but what is it about this economy that can withstand these interest rates? Because it's the resilience that has surprised so many people in the face of what this Fed has been doing.