Interest Rates Should be Cut Immediately, According to a Former President of the New York Fed

Bill Dudley, the former president of the Federal Reserve Bank of New York, reversed his position, advocating an immediate cut in interest rates instead of keeping them higher for an extended period.

Dudley articulated this change in view by stating:

I have changed my mind… Waiting until September unnecessarily increases the risk of recession.

This change is significant, especially given that just two months prior Dudley had argued that a much higher neutral rate could mean that the current federal funds rate of 5.3% was insufficient to control economic growth.

He said the Federal Reserve (Fed) should cut interest rates, ideally at an upcoming policy meeting.

Dudley explained that the robust performance of the U.S. economy over the years shows how the Fed’s measures have not been enough to slow it down. Government spending during the pandemic left individuals and businesses with significant cash reserves.

The Biden administration’s large investments in infrastructure, semiconductors and green technology have fueled demand. In addition, easing financial conditions, especially the stock market upturn, have boosted the spending capacity of wealthier households.

Dusley believes that the Federal Reserve’s attempts to rein in the economy are already showing results. Affluent households continue to spend because of high asset prices and mortgage refinancing at historically low long-term interest rates.

However, many have exhausted their savings, built up by substantial government financial transfers, and are now feeling the strain of high interest rates on credit cards and car loans.