February 1, 2023

‘Very, very unlikely’ the Fed can tame inflation without sparking a recession, former NY Fed chief says

4 min read


Bill Dudley, a former president of the Federal Reserve Bank of New York, told CNN:

The date is not on the feed.

“In the past, when you pushed up the unemployment rate, you almost never managed to avoid a full recession,” Dudley said. “The problem with the Fed is that it’s too late.”

Technically, the Fed has the ability to control inflation by raising interest rates sharply.

The US Federal Reserve is expected to raise interest rates by half a percent for the first time since 2000 on Wednesday. The worst inflation in 40 years
Fitch says the United States will restore all jobs lost during the quake this summer.

In theory, the US Federal Reserve could raise interest rates as needed to stem the tide of inflation. But the more the Fed does that, the greater the risk of miscalculations that end premature recovery.

“That’s why it’s so hard to get rid of soft landings,” said Dudley, who led the New York Fed from 2009 to mid-2018. “As long as you know you’ve overdoed it, the next thing you know, you’re already in recession.”

‘Very difficult assignment’

Current Fed officials and some economists are cautiously optimistic about the economy’s reversal. Fed Chairman Jerome Powell points to the soft landings that occurred in 1965, 1984 and 1994.

“I believe the historical record provides some basis for hope: soft, or at least soft, landings have been relatively normal,” Powell said in March. Speech.

Dudley, however, noted that in these instances, the unemployment rate did not actually increase.

Today, the unemployment rate stands at that. Only 3.6%The Fed considers full employment. And the unemployment rate is expected to fall, perhaps to the level seen since the early 1950s.
The US economy has shrunk.  Don't worry

“The Federal Reserve needs to slow down the economy and make the labor market a little cheaper,” Dudley said. “It’s a very difficult assignment to finish.”

The former Fed official says that history has shown that when the unemployment rate starts to rise, it usually leads to a “complete recession.”

This can be due to psychological reasons. “People, once they see that the job market is getting worse, they start worrying about their job prospects. You step back on consumption and spending,” Dudley said. Said

Low recession risks for now?

The good news is that the recession is not imminent. And Goldman Sachs, Dudley’s former employer, has been telling customers that a recession is not inevitable.

Still, concerns about the economy were bolstered by last week’s GDP report, which showed the US economy. An unexpected deal was struck during the first quarter.
Many economists say the shocking GDP report reflects temporary factors. Strong consumer and business costs overshadow.

Dudley said “some crazy things” about inventories and trade led to a negative GDP, adding that basic demand in the economy was “strong”.

“There’s very little chance of a recession next year,” Dudley said.

More than 50% chance of recession in 2023 and 2024

Concerned neo-hippies and their global warming, i’ll tell ya.

Once the Fed raises interest rates above neutral levels, it will effectively put a brake on the economy. Dudley said that while the risk of a recession is “very high,” the probability of a recession in 2023 and 2024 is “definitely over 50%.”

S&P is making its worst start of a year since 1939.

Of course, the Fed may decide to stop raising interest rates if it fears a downturn.

In some ways, that’s exactly what happened in 2019, when the Fed led by Powell The rate hike was halted amid fears of a slowdown.. No one knows how it turned out, as CoVID-19 was affected early in 2020, forcing the Fed to cut interest rates dramatically.

“The Fed may try to delay,” Dudley said. “But if they do, inflation will probably come back and then they will have to brake harder. Delays don’t really lead to good results. It makes it harder to get on the road.”

‘Policy error’

The recession that is looming today – just two years after the economic recovery – highlights the difficult position in which the Fed finds itself.

Last spring and summer, the Fed shut down high inflation as “temporary”, a phrase it has since abandoned. The central bank has chosen to maintain its emergency policies, hoping inflation will cool.

Inflation has proved to be more stable and broad-based than economists and investors expect, partly due to the surprise disruption of additional CoVID-19 supplies and now the war in Ukraine.

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At the same time, the The job market is back For a full-time job faster than expected. Powell admitted in March that, with the benefit of a retrospective, it would be “appropriate” for the Fed to go into anti-inflation mode first.

Although Dudley says the Fed deserves “credit” for its “powerful and swift” response to the epidemic in early 2020, it suggests that it is also responsible for the inflation response. ۔

“It was too late for them to remove monetary policy accommodation,” Dudley said. “It’s going to be a bit of a policy error, in the past.”



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