Bill Dudley, former president of the New York Fed (2009-2018), called on the Fed to guide interest rates toward a neutral setting.
Dudley, who also chairs the Bretton Woods Committee and has served as a non-executive director at UBS since 2019, suggests that the FED should reduce interest rates by 150-200 basis points from current levels.
In a recent comment, Dudley noted the urgency of adjusting monetary policy, noting that the current tight stance is becoming increasingly restrictive as price and wage inflation moderates. “The longer you wait, the greater the potential for damage,” Dudley warned.
While Federal Open Market Committee (FOMC) members forecast the neutral rate to be between 2.4% and 3.8%, Dudley positions himself in the upper half of that range. Given that the current effective federal funds rate is 5.3%, Dudley emphasizes that a significant adjustment is needed. Dudley also stated that in case of a recession, the FED would have to adopt an even more supportive attitude and could reduce interest rates to 3% or below.
Despite the urgent need for a rate cut, Dudley conceded that such a move was unlikely outside the Fed's regular policy-making meetings, which are usually reserved for responding to serious economic shocks or threats to financial stability.
Attention now turns to the upcoming policy-making meeting on September 17-18, where Dudley suggested the Fed could cut rates by 25 or 50 basis points, depending on economic data in the interim. The path to be followed after this meeting remains unclear. A series of gradual 25 basis point cuts could take interest rates below 4%, or a sharper decline if economic conditions warrant.
“Uncertainty about the course of monetary policy will likely remain high for months,” Dudley said, asking market participants to be prepared for increased volatility in both stock and bond markets.
*This is not investment advice.
