Former New York Fed President William Dudley called for an aggressive 50 basis point rate cut, arguing that such a move would better align with the Fed's policy goals.
In a recent article, Dudley noted that the Fed's dual mandate of price stability and maximum employment has reached a point of balance, suggesting that monetary policy should now be neutral, neither encouraging nor restricting economic activity.
But Dudley noted that short-term interest rates are running significantly above neutral levels, creating an imbalance that needs to be addressed quickly. Dudley argues that a 50 basis point cut would bring rates closer to neutral and in line with the Fed's dot plot expectations for monetary policy.
Market analysts currently predict a total rate cut of 100 basis points by the end of 2024. Dudley warned that a smaller 25 basis point cut now followed by a 50 basis point cut later in the year would send a hawkish signal to the market and raise questions about the Fed’s hesitation to act decisively from the start.
Dudley believes the Fed could have avoided such confusion and balanced market expectations by cutting rates by 50 basis points in September, while also enabling a smoother transition in monetary policy.
*This is not investment advice.