Former New York Fed Chief Dudley Expects 0.75-Point Rate Rise This Week

Mr. Dudley remains an influential voice on central bank issues, and in recent comments has criticized the Fed for being too slow to respond to the inflation surge that has forced central bankers to rapidly shift gears on the rate outlook. This week, in the wake of hot consumer-level inflation data released on Friday, markets have moved from expecting a half-percentage point increase from the Federal Open Market Committee meeting to the larger size move.

“My sense is that the Fed has decided to do 75 basis points rather than 50 basis points because of the data we’ve gotten over the last week or so showing higher inflation and maybe some more disturbing news on inflation expectations,” Mr. Dudley said.

Asked if an even more aggressive 1 percentage point increase would be a good idea, Mr. Dudley said “you can certainly make that argument because if you decide that the speed of getting there is just as important as the level that you’re going to get to, then why not get there faster?” The current federal funds target rate range is now set at between 0.75% and 1%.

“My view is that they’re probably splitting the difference” by going for a 75 basis point increase, Mr. Dudley said.

The former central banker said what the Fed has ahead of it will be painful for the economy. The very hawkish shift in monetary policy is “not fun for the Fed,” adding, “People are going to get put out of work” as a result of what the Fed will do.

Mr. Dudley was joined at The Wall Street Journal event by Ellen Meade, a former top level Fed economist and staff member. She agreed with Mr. Dudley that a 75 basis point rate increase is likely on Wednesday.

She noted that this move, which wasn’t telegraphed by officials in comments ahead of the FOMC meeting, creates fresh challenges for a central bank that likes to use guidance to shape market expectations. Officials strongly pointed to the prospect of a half percentage point rise this week and have done so for weeks.

“Communications are a very important tool and you need to be reliable in your communications,” Ms. Meade said. What has happened with the last-minute shift in rate rise expectations is “an unusual development.”

Mr. Dudley said he doesn’t see a downturn as an immediate consequence of aggressive rate rises, but he said trouble looms.

In forecasts the central bank will release on Wednesday, “I think the Fed is going to basically underscore the notion that we’re going for a soft landing,” Mr. Dudley said.

Fed officials have said they believe that in an otherwise strong economy rate rises will lower excessive demand levels and reduce price pressures back toward the 2% inflation target. While unemployment could rise, they have pushed back at the idea their policy will send the economy into contraction.

“I don’t expect a recession in the very near term,” Mr. Dudley said. “The economy has considerable forward momentum, which is precisely why the Federal Reserve needs to tighten monetary policy quite a bit to slow down the economy, so I think this is mostly a 2023-2024 story in terms of hard landing.”

Mr. Dudley also weighed in on the Fed’s balance-sheet contraction plans. The central bank started to shrink the size of its holdings this month and by fall will be shedding nearly $100 billion a month from what is now a $9 trillion balance sheet.

Mr. Dudley said the balance sheet, at such large levels is still providing stimulus to the economy. Even with allowing some maturing securities owned by the Fed to mature and not be replaced, “the balance sheet is not moving to a tight setting. It’s not going to get even to neutral for about three years,” he said.

Write to Michael S. Derby at [email protected]