May 16, 2016
This is the fourth in a series of profiles of the members of the Federal Reserve Board’s Open Market Committee [FOMC]. The profiles will focus on their writings, public statements, and voting records as members of the FOMC.
Since assuming office in January 2009, New York Federal Reserve Bank President William Dudley has been considered one of the Fed’s more dovish members. With some exceptions, Dudley has generally been a supporter of stimulus measures such as quantitative easing (QE) and low interest rates.
In a November 2010 New York Times article titled Under Attack, Fed Officials Defend Buying of Bonds, Dudley argued that QE was lowering long-term interest rates and raising employment.[1] He also said that high inflation was a non-existent problem and that policymakers should be worried instead about deflation.[1] In a speech the previous month, Dudley stated that “low and falling inflation is a problem for several reasons,” most notably because low inflation makes it hard for borrowers to pay off their debts and because low inflation in the short-term leads to declining expectations for future inflation.[2] The latter factor, he argued, can actually push down present inflation.[2] In discussing a possible drop in inflation expectations, Dudley made it clear that he viewed joblessness as a far more significant problem than inflation:
“Such a tightening would clearly be highly undesirable at a moment when unemployment is too high, inflation is too low and the economy has only moderate forward momentum.”[2]
Dudley also went on to state that “inflation being ‘too low’ (just like inflation being ‘too high’) is an impediment to achieving the full employment objective of the [Fed’s] dual mandate.”[2] He furthermore argued that if the Fed were to target a given rate of inflation (it was not targeting 2 percent inflation at the time of Dudley’s speech), it should allow the economy to go over the target inflation rate for a given period of time in order to offset the time spent below the target rate.[2] Dudley continued making these same arguments in 2011, stating that the Fed shouldn’t withdraw monetary stimulus, as such a move would hinder the Fed’s dual mandate of full employment and price stability.[3] He reiterated that inflation was running problematically low and said that the labor market was well short of full employment; he also stated that in order to return to full employment in 2012, the economy would have to add 300,000 jobs per month.[3]
In May 2012, Dudley seemingly reversed course. In a press briefing on the state of the New York economy, Dudley took a slight tangent to discuss Fed policy towards the national economy, stating:
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think benefits of further action are unlikely to exceed the costs.”[4,5]
However, later in the year Dudley came out in favor of a third round of QE, arguing that further action by the Fed was necessary in order to boost growth in GDP and employment.[6] At the National Association for Business Economics Annual Meeting in October, Dudley not only called for stronger Fed action going forward, but also stated that past Fed policy had been too weak.[7] A New York Times article highlighting some of Dudley’s statements:
“Monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances,” Mr. Dudley said.
He underscored the point later, saying, “With the benefit of hindsight, monetary policy needed to be still more aggressive.”[8]
At other points in the speech, Dudley argued that the Fed shouldn’t raise rates based on fears of asset bubbles or accelerating inflation; that a weak labor market in the short-term could have long-term scarring effects on the economy; and that the Fed’s ultimate objective was “maximum sustainable employment in the context of price stability.”[7] The speech seemed to affect perceptions of the Fed’s commitment to QE, with various media outlets reporting on the vigor of Dudley’s defense of the program.[8,9,10] Dudley continued advocating for monetary stimulus in 2013, publicly stating his opposition to a tapering of the Fed’s QE program and even saying that he was open to further easing.[11,12,13] He also stated that a “rise in short-term rates was very likely to be a long way off.”[14]
In 2014, Dudley sent mixed signals to the market. On the more stimulative side, he said that the unemployment rate would have to dip below the rate consistent with full employment in order to push inflation back up to the Fed’s target – a statement which seemingly indicates opposition to monetary tightening.[15,16,17] In a conference organized by Bloomberg News, Dudley called for allowing the unemployment rate to fall further as a way of pushing inflation up to 2 percent (as reported by Reuters):
“We need the economy to run a little hot for at least some period of time to push inflation back up to our objective,” Dudley said at a conference organized by Bloomberg News. “I can certainly imagine a scenario where the unemployment rate dips a little bit below what we view as sustainable. That would be the mechanism to actually push inflation back up.”[18]
However, Dudley made this statement while also expressing some degree of support for an interest rate hike. He called a mid-2015 jump in interest rates a “reasonable forecast,” and a Reuters article indicated an explicit desire from Dudley for this increase (emphasis added): “That first rate hike is expected next year, a policy change Dudley said he hopes can take place in order to begin lifting rates from the zero level where they have remained for six years.”[16,17,18]
When 2015 actually came around, Dudley sent yet more mixed signals. In August, he was the first Fed official to come out in opposition to an immediate rate hike (which was being debated for September).[19,20] But even while making an argument against an immediate rate hike, Dudley said he’d like to raise rates in October or December.[21] After voting with his fellow FOMC members to not hike rates in September and October, Dudley gave rather tepid, ambiguous statements about his views on monetary policy in November. He argued both that the Fed was nearly ready to raise rates and also that the Fed should worry about low inflation and declining expectations for future inflation.[19,22] Low and possibly declining inflation would typically require lower rather than higher interest rates. Yet when the December FOMC meeting came around, Dudley voted to raise the Federal Funds interest rate.
Dudley appears to have reversed his stance in recent months – though again, his statements have been tepid. For example, Dudley’s widely cited defense of low interest rates comes primarily from this statement: “I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside.”[23,24,25] In general, Dudley’s statements have focused on the harm done by low inflation, though he has also expressed worry over slow growth.[23,24,25,26,27] In one instance, he voiced concerns about the prospect of not just low inflation but outright deflation.25
Overall, Dudley appears to be a moderate dove. With the exception of one brief episode in 2012, he consistently supported monetary stimulus from 2009 to 2013. In recent years, he has expressed very mild, wavering support for low interest rates.
[1] Chan, Sewell. Under Attack, Fed Officials Defend Buying of Bonds. November 2010. New York Times.
[2] Dudley, William. The Outlook, Policy Choices and Our Mandate. October 2010. Society of American Business Editors and Writers Fall Conference, City University of New York, Graduate School of Journalism.
[3] Derby, Michael. Fed’s Dudley: Economy’s ‘Soft Patch’ Is Temporary. May 2011. Wall Street Journal.
[4] Appelbaum, Binyamin. What the Jobs Report Means for the Fed. June 2012. New York Times.
[5] Dudley, William. Job Polarization in the Region. May 2012. Quarterly Regional Economic Press Briefing, New York City.
[6] Central Banking Newsdesk. NY Fed’s Dudley Confident in QE3 Benefits. September 2012. Central Banking.
[7] Dudley, William. The Recovery and Monetary Policy. October 2012. National Association for Business Economics Annual Meeting.
[8] Appelbaum, Binyamin. Fed Official Says Monetary Steps Were Too Timid. October 2012. New York Times.
[9] Censky, Annalyn. Fed’s Dudley: Stimulus Could Have Been ‘More Aggressive’. October 2012. CNN.
[10] Central Banking Newsdesk. Fed’s Dudley Says FOMC Policy Actions Were Justified. October 2012. Central Banking.
[11] Central Banking Newsdesk. Dudley Calls for New Plan to Avoid Market Overreaction when Fed Heads for the Exit. May 2013. Central Banking.
[12] Central Banking Newsdesk. Top Fed Officials Speak Out to Calm Markets. June 2013. Central Banking.
[13] Harding, Robin, and Vivianne Rodrigues. US Economy Not Ready for Tapering, Says Fed Official. September 2013. Financial Times.
[14] Appelbaum, Binyamin. Fed Officials Try to Ease Concern of Stimulus End. June 2013. New York Times.
[15] Torres, Craig. Dudley Says Fed Needs U.S. Economy to Run ‘A Little Hot’. September 2014. Bloomberg.
[16] Saphir, Ann. Fed’s Dudley Sees Mid-2015 Rate Hike as ‘Reasonable’. June 2014. Reuters.
[17] Reuters. Interest Rate Increase Is Not Seen as Imminent. June 2014. New York Times.
[18] Schneider, Howard. U.S. Economy May Need to Exceed Full Employment for Inflation to Rise: Fed’s Dudley. September 2014. Reuters.
[19] Appelbaum, Binyamin. Several Fed Officials Say They Are Ready to Raise Rates. November 2015. New York Times.
[20] Eavis, Peter. Soothing Talk by Federal Reserve Official Buoys Wall Street. August 2015. New York Times.
[21] Appelbaum, Binyamin. Market Turmoil Prompts New Speculation on the Fed’s Timetable. August 2015. New York Times.
[22] Central Banking Newsdesk. Dudley Leads Fed Speeches as December Meeting Looms. November 2015. Central Banking.
[23] Reuters. Fed’s Dudley Sees Risks to US Economic Outlook Tilting to Downside. March 2016. CNBC.
[24] Robb, Greg. Fed’s Dudley Sees Downside Risks to Growth and Inflation Outlook. February 2016. MarketWatch.
[25] Dougherty, Carter. Fed’s Dudley Signals Interest Rates Could Stay At Historic Lows For Longer Amid Tightening Financial Conditions. March 2016. International Business Times.
[26] Central Banking Newsdesk. Dudley Flags International Uncertainty and Expectations Concern. March 2016. Central Banking.
[27] CNBC.com Staff. Fed’s Dudley Warns Conditions Are Tightening. February 2016. CNBC.
