William Dudley, ex-New York Fed President, reverses his stance on interest rates. Previously a strong advocate for maintaining higher rates to control inflation, Dudley has dramatically shifted his position. This change comes despite his earlier calls for increased Fed rates, made as recently as spring. Dudley, a Bloomberg Opinion columnist, serves as a non-executive director at UBS and chairs the Bretton Woods Committee. In a recent Bloomberg opinion column on Wednesday, Dudley invoked a sentiment often credited to John Maynard Keynes: “When the facts change, I change my mind.” He boldly recommended: “The Fed should cut rates, ideally at their upcoming policy meeting next week.” He also stated, “I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.”
Citing the winding down of pandemic-era savings, the fading impact of Biden Administration spending, a weakening job market, and fading inflation pressures, Dudley thinks waiting until the Fed’s September policy meeting could trigger renewed recession risks.
A September Fed interest rate cut in focus
An article in The Street discusses the potential for a September interest rate cut by the Federal Reserve. According to CME Group’s FedWatch tool, the likelihood of a rate cut in July is just 5%. Still, following Chairman Jerome Powell’s Jackson Hole speech at the end of August, the chances of a cut in September are considered almost inevitable.
Dudley suggests this is because Powell needs to build a broad consensus among policymakers and is concerned that the stalled progress on inflation from last year could recur in the latter half of 2024.
Dudley noted, “Fed officials appear unconcerned about the unemployment rate potentially crossing the Sahm Rule threshold.” This rule, developed by economist Claudia Sahm, indicates heightened recession risk when unemployment rises by 0.5 percentage points.
He warned, “History shows that weakening job markets often create a downward spiral. As employment opportunities shrink, consumer spending falls, economic growth slows, and businesses cut back, leading to more job losses and further reduced spending.”
Weakening Labor Market Prompts Revised Interest Rate Predictions
The Labor Department’s recent report showed 206,000 new jobs in June, but unemployment surpassed 4% for the first time in over two years. Despite this, Fed Chair Powell described the job market as “strong” and the economy as expanding at a “solid pace” in his July 9 congressional testimony.
Key upcoming economic indicators include:
- Q2 GDP growth estimate (July 25): Expected at 2%
- PCE inflation index for June (July 26): Core deflator anticipated to rise to 0.2% monthly
July’s S&P Global PMI survey noted increased business activity, with services sector performance at its highest since March 2022.
Despite Dudley’s recommendation, a July rate cut seems unlikely. The Fed is expected to wait for more jobs and inflation data before Powell’s August 22 Jackson Hole symposium address.
Conclusion
Powell stated at a recent Economic Club of Washington event: “We’ve maintained that easing policy wouldn’t be suitable until we’re more confident about inflation returning to our 2% target.”
He elaborated, “While the first quarter didn’t boost our confidence, the three readings from the second quarter, including last week’s, have somewhat increased it.”
