Hike rates

Dudley says the Fed will raise rates much further than markets expect

(Bloomberg) – Financial markets are underestimating how far the Federal Reserve will go to rein in decades-high inflation, according to former New York Fed Chairman Bill Dudley.

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During a press conference following the central bank’s decision to raise interest rates an additional 75 basis points, Chairman Jerome Powell repeatedly referred to his colleagues’ summary of economic projections. June as the “best guide” to where the committee needs to tighten policy. This shows the fed funds rate ending this year at 3.25%-3.5%, plus another 50 basis points of tightening in 2023.

“That’s a bit more than what’s valued in the markets today,” Dudley said in an interview with Bloomberg Television. “The fact that he backtracked on the June SEP projections three to four times in his remarks suggests to me that the Fed thinks it’s going to do a little more than what’s being marketed today.”

Given the high degree of economic uncertainty, Powell said the Fed would make meeting-by-meeting decisions and follow incoming data rather than providing “clear guidance” on rate moves.

Financial markets gained after the decision and throughout Powell’s press conference, in what Dudley called a “relief rally” now that the meeting is over. However, he said the rise in markets is “very capped” and the Fed needs tighter financial conditions to create slack in the labor market and lower inflation.

Dudley disagrees with Powell’s assessment that the Fed has already raised rates to a neutral range. Given the level of uncertainty, “I would be a little more skeptical,” Dudley said, adding that the terminal rate is likely closer to 4%.

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