Bill Dudley on the Fed’s Plans

Bill Dudley, the Grand Poobah of the New York Fed, gave an interesting speech yesterday. It’s long but you might want to check out the whole thing.

There are a few key takeaways. One is that Dudley said he expects growth and inflation to rise this year and next. I suspect he’s right.

What caught my attention were his remarks on real interest rates. Dudley said that if inflation gets up to 2%, then he expects interest rates to stay “well below” 4.25% which would be the expected level for a recovery. In other words, he doesn’t think we’ll get back to the normal level of 2.25% for real rates. If that’s the case, then Dudley thinks the Taylor Rule, which uses 2% as an equilibrium, won’t be so useful.

Dudley lists three reasons for his low-rate forecast. One, he expects “economic headwinds seem likely to persist for several more years.” Secondly, he points to slower labor force growth and an aging population. Finally, he names bank regulation and higher capital requirements.

Dudley also addressed how the Fed plans to start raising rates. This is a big question mark. The Fed has been testing its reverse repo facility which is a new idea. We’ll find out more sometime next year when it’s time to raise rates.

Posted by on May 21st, 2014 at 10:48 am


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