Fed is more worried about labor market than Powell let on, William Dudley says

By Greg Robb

Powell did a 'great job' of explaining reasons for aggressive rate cut in a 'non-scary way,' former Fed official says

The Federal Reserve cut its policy rate by an aggressive half-point because it is more worried about the labor market than Federal Reserve Chair Jerome Powell let on, former New York Fed President William Dudley said on Thursday.

"I actually do think they think the risks to the labor market are greater than the risks to the inflation side at this point in time," Dudley said during a discussion of the Fed's action sponsored by OMFIF, an independent forum for central banking based in London.

"I thought Powell did a great job yesterday of explaining this in a non-scary way," Dudley said.

The Fed decided to cut its policy rate by a half-point to a range of 4.75%-5% rather than taking the more gradual approach of a quarter-point move that was expected by many economists. Dudley was in the half-point camp ahead of the meeting.

At his press conference, Powell said he wasn't worried about the economy falling apart.

"I don't see anything in the economy right now that suggests that the likelihood of a downturn is elevated," he said.

Powell stressed that the central bank saw the risks of a worsening labor market and higher inflation as being in balance.

He also said the Fed wasn't chasing a weak economy.

"You can take this as a sign of our commitment not to get behind," he said.

Dudley said the balance-of-risks chart included in the Fed's economic projections clearly shows "the committee worries much more about the risk of the labor market now than they do worry about a bad surprise on inflation."

In his discussion at OMFIF, Dudley said he thought that Powell wanted to cut rates by a half-point and brought the committee along with him. He noted that the Fed's dot-plot shows that nine Fed officials have projected only one more quarter-point cut this year.

A slim majority of 10 have penciled in two moves.

He said this indicated that Fed officials likely went into the meeting expecting quarter-point moves over the final three meetings of the year, and that the size of yesterday's cut ate up two of those moves.

Fed governor Michelle Bowman was the only dissenter at the meeting. She was the first of the seven Fed governors to dissent since 2005.

Asked if Powell could run into trouble with the bond market later this year and into next because the market expected more rate cuts than he could deliver, because he was "dragging his committee along," Dudley said it was certainly possible.

"The markets are pretty aggressive in the near term," Dudley said, adding that he expects more some probability of another half-point cut this year along with an additional quarter-point move.

That's more than the 50 basis points of cuts the Fed is projecting this year.

But Dudley said that at the end of the day, he doesn't worry about that too much.

"The Fed is going to do what it does, and markets are going to be forced to adjust," he said.

-Greg Robb

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09-19-24 1623ET

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