That’s William Dudley, the former president of the powerful New York Fed, arguing in a guest column at Bloomberg that his former colleagues won’t get a handle on inflation that’s running at around a 40-year high unless they make investors suffer.
There are myriad uncertainties the Fed must navigate, he acknowledged, including the effect of easing supply-chain disruptions and a historically tight labor market. But the effects of the Fed’s tightening of monetary policy on financial conditions — and the the effect that tightening will have on economic activity — is one of the biggest unknowns, Dudley wrote.
Unlike many other economies, the U.S. doesn’t respond directly to changes in short-term interest rates, Dudley said, partly because most U.S. home buyers have long-term, fixed-rate mortgages. But many U.S. households, also in contrast to other countries, have a significant amount of their wealth in equities, which makes them sensitive to financial conditions.
Dudley’s call for the Fed to inflict losses on investors stands in contrast to the longstanding notion of a figurative Fed put, the idea that the central bank would halt monetary tightening or otherwise ride to the rescue in the event of heavy losses in financial markets. Dudley, who ran the New York Fed from 2009 to 2018, was previously chief U.S. economist at Goldman Sachs and is now a senior research scholar at Princeton University’s Center for Economic Policy Studies.
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