The Fed must 'inflict' more losses on stock investors to tame inflation: Dudley
“‘It’s hard to know how much the U.S. Federal Reserve will need to do to get inflation under control. But one thing is certain: To be effective, it’ll have to inflict more losses on stock and bond investors than it has so far.’”
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.
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.
The pain has been more intense in the bond market. Treasury yields, which move the opposite direction of prices, have soared, albeit from historically low levels. First-quarter losses in the bond market were the worst in a quarter century.
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