Defeating inflation without crashing the economy is still a challenge - Dudley
Why is the economy so strong? Maybe previous monetary tightening has yet to fully play out, or maybe the abatement of frictions in supply chains and the labor market has been providing a transitory boost to growth.
There is, however, a competing explanation:
Maybe monetary policy isn’t all that tight.
That is, maybe the neutral, inflation-adjusted interest rate — the level that neither stimulates nor damps growth — is higher than Fed officials’ estimate of 0.5%, meaning that the current federal funds rate is less restrictive of growth.
I think this is right: Large and chronic fiscal deficits, together with public subsidies for green investment, have pushed up the neutral interest rate.
If so, the Fed should hold rates higher for longer.
Bill Dudley Bloomberg 20 februari 2024
Bill Dudley, a Bloomberg Opinion columnist, served as president of the Federal Reserve Bank of New York from 2009 to 2018.
He is the chair of the Bretton Woods Committee, and has been a nonexecutive director at Swiss bank UBS since 2019.
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