The Federal Reserve “hasn’t accomplished anything” in loosening the US labour market even after four consecutive 75-basis-point hikes, former New York Fed President Bill Dudley said.
Friday’s jobs report showing a 261,000 gain in payrolls and a slight uptick in unemployment in October is “not consistent with a loosening labour market,” Dudley, chair of the Bretton Woods Committee, said at a conference on the future of finance in Singapore Monday.
“There’s a lot of work to do, and unfortunately it’s gonna put a lot of pain on the rest of the world because as the Fed tightens, the dollar appreciates, that puts more pressure on other emerging-market economies -- especially those that have taken on a lot of dollar debt,” he said.
The dollar pain already has been evident as currencies across the emerging and developed world take a beating, putting pressure on central bankers to hike or intervene in markets; or both. At the same time, growth and debt risks have set many economies on a different policy course, with the UK, Australia, and Canada among those notably diverging from the Fed’s path.
“The Fed’s reaction to all this is, ‘Really very sorry that we’re causing all the pain for you, but we have to take care of our core problem, which is US inflation -- getting it back down to 2%,’” said Dudley.
What Fed Chairman Jerome Powell wants is “to take enough medicine today so that inflation expectations don’t become unanchored so he doesn’t have to do something really, really harsh later,” said the former Fed official. The US central bank started “very slow off the mark” in tightening, and this was evident in the four outsized hikes it had to do, Dudley said.
“We’re at the very beginning of that mission” to tighten policy enough to slow down the economy and push down inflation, he said. “The Fed actually hasn’t accomplished anything yet in terms of loosening up the labor market.”
More from Dudley at the conference:
He said the raging debate about whether post-Covid inflation is “transitory” is misleading, given that it has elements of both. “There’s transitory elements like used-car prices, but there’s also pieces that are much more persistent,” he said. “The problem we have in the US today is that underlying inflation is running somewhere between 4 and 6% depending on what measure you look at”
On whether the Fed would boost its 2% target, Dudley is skeptical, as “people would view that as not credibility-enhancing”
Asked about stability in the US financial markets, Dudley said “worries are pretty low” since there’s been a lot more focus on shoring up the banking system since the Global Financial Crisis and balance sheets of households and businesses are in a much better place
“I don’t think the US is in a UK situation,” he said. The US doesn’t have a similarly “very bad fiscal proposal” and the US banking system is healthier and a smaller share of the domestic financial sector than in the UK
Still, there is “residual concern” about the size and growth of the US Treasury market with the balance sheet of the primary dealers supporting that market not growing “commensurately”