MNI BRIEF: Fed Will Be Slow To Cut Interest Rates - Dudley

The Federal Reserve must keep a close eye on inflation expectations and work to maintain anchored prices, likely resulting in its being slow to lower interest rates in the coming months, former New York Fed President William Dudley said Wednesday. 

"One reason why the Federal Reserve will probably be fairly slow to cut rates over the next few months is because of concerns that if they make an error and it turns out that the inflation expectations do become unanchored that would make it much more difficult to get inflation back down to their 2% objective," Dudley said in Q&A, as part of a G30 Special Report Webinar on the Fed's framework. (See: MNI INTERVIEW: Fed Needs More Hawkish Message - Emmons) 

"Higher tariffs are going to drive up prices and they're also going to drive down economic growth," the former vice chair of the FOMC said. "The Federal Reserve is very concerned that another year of inflation above the Fed's target -- this is going to be the fifth year in a row -- increases the risk that inflation expectations could become unanchored. They don't want inflation expectations to become unanchored. They hope they won't become unanchored. They're determined to prevent that from occurring, but they have to take that risk into consideration in terms of how they set monetary policy." 

Dudley also said the general view is that the neutral interest rate is a little bit higher than before the pandemic but "that could be changing as we speak," he said. 

"We're undertaking a pretty big regime change in terms of not just U.S. trade policy, but also policy with respect to immigration, deportation. We have a lot of uncertainty about fiscal policy. All those things are going to weigh on r-star," he said. "I would not want to take the current estimates of r-star with any degree of confidence at this point"