Former Federal Reserve Bank of New York President William Dudley anticipates that the US central bank will keep going with the runoff of its bond portfolio, despite the sudden surge of problems in the banking sector.
(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley anticipates that the US central bank will keep going with the runoff of its bond portfolio, despite the sudden surge of problems in the banking sector.
“I expect that quantitative tightening will continue,” Dudley said in an interview on Bloomberg Surveillance Monday. That program is “very separate and different” from the steps that the Fed is taking to shore up confidence in the banking system, he said.
Fed policymakers start a two-day meeting Tuesday where they will decide whether to keep raising interest rates after the second-biggest bank collapse in US history triggered shocks that reverberated across global financial markets. Aiming to stem contagion, the Fed launched a new lending facility and eased rules for banks to access cash from its discount window.
Dudley, a senior adviser to Bloomberg Economics and contributor to Bloomberg Opinion, said if he were at the Fed still he would ask what more the central bank could do on the liquidity front. But the Fed’s program of letting its holdings of Treasuries and mortgage-backed bonds run down “is going to continue unabated,” he said.
As for the interest-rate decision, Dudley said that he would vote for no change on Wednesday if he were still on the rate-setting panel.
‘No Harm’
“The case for zero is: do no harm, we know the banking system is under stress so why would you continue to raise rates when the banking system is under stress,” Dudley said.
The former New York Fed chief also said that the current problems are not the global financial crisis “all over again.” In this case, it’s not about a collapsing economy, but about a question of confidence in banks’ uninsured deposits and mark-to-market losses on securities, he said.
The key question now is “how much is this stress that we’re seeing today going to result in tighter credit conditions that are going to change the trajectory of economic growth,” Dudley said.
–With assistance from Jonathan Ferro and Lisa Abramowicz.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.