Former NY Fed President Bill Dudley Talks Warsh Testimony

**SPEAKER_1** (0:02)
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**SPEAKER_2** (0:07)
So here's the latest this morning. Traders boosting bets. The Federal Reserve will raise rates later this month. Investors are waiting fresh inflation data. And Fed share Kevin Warsh's testimony on Capitol Hill a little bit later this morning. The former New York Fed President Bill Dudley joins us now for more. Bill, what was your reaction to that? Welcome to the show, buddy. What was your reaction to that speech yesterday? And what is the likelihood that this meeting this month is indeed live?

**William Dudley** (0:32)
Well, I think it is live because inflation has been above the Fed's target for over five years. And the core inflation has stayed quite sticky over the last few months. Waller basically is providing the guidance to the market about how the Fed is likely to react if the inflation news is bad that Kevin Warsh has been unwilling to provide.
This is one of the problems that Kevin Warsh, I think, has. If he continues to be as silent as he has been about how the Fed is likely to react, his voice is just going to be replaced by other people that are going to provide more insight into terms of how the Fed is likely to react. I think there's a strong case for tightening monetary policy. I don't see much evidence that monetary policy is actually restrictive right now. Financial conditions are extremely accommodative, and that's providing quite a strong impulse to the economy. And then you have the AI investment spending boom, which is likely to continue for a while longer. Both those things, to me, argue for the Fed to raise rates. The Fed isn't there yet. I don't think Kevin Warsh is there yet. If you look at what he said in his public remarks, pretty optimistic about AI helping you on productivity, holding down inflation.
But Waller has put a marker down. I think there's a lot of other people on the fence that feel the same way.

**SPEAKER_2** (1:45)
Bill, do you think that's where we can find some common ground?
There are some people that do think we are slightly restrictive. Many on the FOMC do not share that view. But can we find consensus around the following idea that we aren't sufficiently restrictive to get inflation back to target? Is that where we can find some consensus on the committee?

**William Dudley** (2:04)
I don't think there's much evidence of that. We've been in this supposedly restrictive setting for several years now, and inflation hasn't come down in the economy and the unemployment rate hasn't gone up. So it seems to me that the evidence that monetary policy is exerting restraint is really quite weak in the current venue.

**SPEAKER_4** (2:19)
Bill, we've been just getting bank earnings. And frankly, it seems like all cylinders are firing as quickly as they possibly can record after record after rector in capital markets as well as Main Street activity that seems to be re-accelerating. By not hiking interest rates, do you think that this Fed is allowing some sort of capital markets bubble, effervescence, whatever you want to call it, to build?

**William Dudley** (2:42)
Well, William and Chesney Martin used to say that the Fed's jobs take away the punch bowl when the party just starts getting good. I would say the party is getting really good right now. So this is the flip side of financial conditions being very accommodative. And so I think that argues for the Fed raising rates a little bit.
The CPI will get a good headline CPI this month, but that's not going to have as much weight now that the war in Iran has started back up and energy prices are headed back up. So it's really what's happening to inflation beyond energy prices that's really going to get better. And I think that's what Waller flagged this this past week.

**SPEAKER_4** (3:21)
There's a question about the idea of outsourcing some of the commentary to other Fed officials on the part of Kevin Warsh with Chris Waller really sucking up the oxygen in the room. Do you think that this is actually a desirable outcome or do you expect Governor, Fred President, Fred Chair Warsh to clip the wings, say, of a Chris Waller?

**William Dudley** (3:43)
I don't think that the Fed Chair has a lot of power to limit the ability of people to talk about their outlook for monetary policy. That's what Fed officials do. That's their job is to conduct monetary policy.
I think the problem that Kevin Warsh might have is that as people like Kevin, people like Chris Waller speak up and Warsh does not provide similar guidance about what his monetary policy reaction function is, it basically makes him less important. It makes people like Chris Waller more important in terms of guiding markets.