Powell misreads what's powering U.S. economy, former Fed official says
By Greg Robb
Fed chief underestimating how much easy financial conditions are fueling economy, says former N.Y. Fed president
Federal Reserve Chairman Jerome Powell is misreading a source of strength for the U.S. economy, a former top Fed official said Thursday.
Powell argued in a talk on Wednesday that the reason why the U.S. economy has been stronger than expected for more than a year is that supply chains are normalizing. Getting rid of the roadblocks gives a the economy a one-time shot in the arm.
In Powell's view, interest rates are high, or restrictive, enough to slow demand and bring inflation down. The Fed's benchmark federal funds rate is in a range of 5.25%-5.5%.
At issue is the so-called "neutral rate" where interest rates would be if the economy was growing around 2% and inflation was at 2%.
Last month, the Fed slightly revised its estimate of the neutral rate to 2.6% from 2.5%.
In an interview on Bloomberg Television, Bill Dudley, former president of the New York Fed, said he believes the Fed estimate is still well short of where neutral should be.
Dudley said he thinks the neutral rate might be as high as 4%, where it was before the 2008 financial crisis.
One of the signs that rates are not tight is that financial conditions have eased since October. Dudley said Powell is overlooking how this easing is fueling growth.
"I think that what he's underestimating is the fact that financial conditions have eased a lot since October and that is providing supplying considerable support to the economy," Dudley said.
In the interview, Dudley said this underestimation won't necessarily impact the short-term view of Fed policy. The central bank's projection of three rate cuts this year remains "in the realm of possibility," he said.
The important difference is that where the Fed thinks it will stop cutting rates, he said.
The Fed now projects that it will bring gradually bring rates down to 3.1% in 2026.
The market has revised up its forecast that the Fed will stop cutting to 3.75%, according to CME FedWatch tool.
"This time around, the market has it right," Dudley said. This view is what's been driving up the 10-year Treasury yield BX:TMUBMUSD10Y recently, he said.
-Greg Robb
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04-04-24 1155ET
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